What is gap insurance?issuing time: 2022-04-07
Gap insurance is an insurance policy that covers the difference between what you owe on your car loan and the actual value of your vehicle. This type of coverage is typically required if you lease or finance a car.
How does gap insurance work?
Gap insurance is an insurance policy that covers the difference between what you owe on your car loan and the actual cash value of your vehicle. If your car is totaled in an accident or stolen, gap insurance will pay the remaining balance on your loan.
Who needs gap insurance?
If you are financing or leasing a vehicle, your lender likely requires you to have gap insurance.
Gap insurance covers the difference between what you owe on your vehicle and its actual cash value in the event that it is totaled or stolen. This coverage is important because, without it, you may be responsible for paying the entire balance of your loan or lease even if your car is no longer usable.
If you are not required by your lender to have gap insurance and decide to purchase it anyway, make sure that it is included in your comprehensive and collision coverage so that you can receive the full benefit of the coverage in the event that you need it.
When do you need gap insurance?
Gap insurance is insurance that covers the difference between what you owe on your car and its actual cash value in the event of a total loss. If you have a loan or lease on your car, gap insurance is often required by the lender.
Total Loss Coverage
If your vehicle is totaled in an accident or stolen and not recovered, your auto insurance policy will only pay you up to the actual cash value (ACV) of the vehicle. The ACV takes into account depreciation – which is the decrease in value due to wear and tear, age, or mileage. So if you owe more money on your vehicle than it’s worth, you could be left with a substantial financial burden.
That’s where gap insurance comes in. It pays the “gap” between what you owe on your car loan or lease and the ACV of your vehicle. In other words, it covers the amount of money you would still need to pay even after your regular auto insurance policy pays out its claim.
Most lenders require gap insurance if you're leasing a car or if you financed it with a loan and put less than 20 percent down when you bought it.
What are the benefits of gap insurance?
There are a few key benefits to gap insurance:
- It can help cover the difference between what you owe on your car loan and what your car is worth in the event of an accident or theft. This coverage can be vital if you have a loan with a high interest rate, as it can prevent you from being stuck with a large bill.
- Gap insurance can also help cover the cost of a new car if yours is totaled in an accident. This coverage can give you peace of mind knowing that you won't be left without transportation.
- Finally, gap insurance can provide financial protection in the event that you are unable to make payments on your car loan due to an involuntary job loss or disability.
What are the drawbacks of gap insurance?
Gap insurance is not right for everyone. If you have a newer car, owe very little on your car loan, and are comfortable with self-insuring, gap insurance may not be worth the cost.
Additionally, because gap insurance pays out in the event of a total loss, it is only beneficial if your car is totaled or stolen. If your car is damaged but repairable, you will still be responsible for paying the repair bills.
Is gap insurance worth it?
Gap insurance is an optional coverage that helps pay off your auto loan if your car is totaled or stolen and you owe more than the car’s depreciated value.
If you have a loan on your car, gap insurance is generally worth it. The coverage pays the difference between what you owe on your loan and what your car is worth at the time of the total loss.
If you don’t have a loan, gap insurance isn’t necessary because you would only get paid the actual cash value of your vehicle, which should be covered by your regular auto insurance policy.