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What is Gap Insurance and What Does it Cover?

According to research, a little over 30% of drivers either rent or lease their vehicles. This means that not only are the primary owners, but they may still have existing payments to make on it. Some drivers also take out an auto loan which means their vehicles are still being financed. With all these vehicles having active payment plans still on them, what happens if they were to be totaled or wrecked? How much of the damage will traditional auto insurance cover?

Basic auto insurance will only provide coverage within the limits you set for it. If the car is totaled, then you will be paid out the actual cash value of the car at the time of sale. In a normal case, you pay your deductible then the insurance provider covers the injuries and damage. But what it doesn’t cover, though, is your remaining payments on the leased or auto loaned car.

For leased car payments and other expenses that slip under the auto insurance radar, the remedy is gap insurance or guaranteed asset protection, as it’s also known. Gap insurance isn’t necessarily used in the event that a car is totaled. It also has applications for vehicle repairs, theft, or any major accident which results in significant damage. Gap insurance isn’t a mandatory requirement for drivers, but it’s a very smart thing for drivers with leased or loaned cars to carry. The last thing anyone wants is to continue putting money towards a car they can’t even drive anymore.

How Does Gap Insurance Function?

First thing is first, in the world of auto insurance, there are two different kinds of coverage you can insure your vehicle with -basic and full coverage. Basic refers to just having your state’s required liability insurance and nothing else. In contrast, full coverage includes such things as comprehensive and collision insurance on top of liability. While comprehensive and collision coverage aren’t required by law, they may be required by your car lender or leasing company. This is a common practice that they use in order to make sure you are able to pay off your car loan -even if the car is totaled.

These auto insurance policies have a payout equal to the car’s actual cash value, which refers to its value at the time of the accident. That’s all good, but the problem is you are still stuck with the car payments. Gap insurance is essentially insurance coverage that covers payments such as these, so you won’t be stuck with them after your car is totaled or unusable. Gap insurance isn’t always required by car lenders, but when they are, there may be certain coverage limits you must carry.

An Example of Gap Insurance in Action

Maybe you’re more of a practical learner and learn best with an example. This is also the best time to brush up on gap insurance terminology. We’ll start with your car’s actual cash value. This is how much your car is worth at present. Your auto loan balance refers to how much you have put towards the car in lease payments. If your car is totaled, it may lose its actual cash value, but the remaining lease payments will not go away.

Let’s say that you owe around $8,000 on your car lease plan. You total your car which was worth $5,000 at the time of the accident. After you pay your deductible and file your claim, your insurance will provide the totaled payout of $5,000, but that means you are still on the line for the remaining $3,000. This amount is how much you have remaining on your lease or loan payment towards the car, which is never covered by standard auto insurance. Gap insurance will cover that difference if you carry it.

What Doesn’t Gap Insurance Provide Payout For?

Gap insurance is predominantly used for covering the difference between the actual cash value of the car and the current balance of their auto loan payments. For this reason, it’s often purchased by drivers with leased cars.

That being said, here is what isn’t covered by gap insurance:

  • Unpaid payments towards a car lease or loan.
  • Any insurance or warranties bought with the lease.
  • Balances from previous loans.
  • Lease penalties.
  • Security deposits.
  • Old age and prior damage.
  • Additional features and equipment.
  • Mechanical or interior issues.

Situations When You Could Use Gap Insurance

We’ve already talked a little bit about what happens when your car is declared totaled after an accident. The definition of totaled means that the cost to repair the car itself exceeds the actual cash value of the car. Car insurance will not cover these repairs but rather provide a payout equal to the car’s value at the time of the accident (actual cash value), so you can put money towards a new car since repairs are not worth it.

Another case where the car insurance company pays out a car’s actual cash value is when the car is stolen and never recovered. If a leased car is stolen, that would mean the driver would still have to take care of the lease payments even though the car is gone, similar to a totaling. The main point of gap insurance isn’t to make sure you’re covered when you lose the use of your car but to also protect you against lease payments on a car you can’t drive anymore.

Who Should Get Gap Insurance?

Right out of the gate, we can tell you that the drivers who should always carry gap insurance are those who finance or lease their cars. Drivers who own their cars wouldn’t get much use out of it since there are no car payments they have to keep up with. Even if they did carry gap coverage, there would be no payout. Another indicator of whether gap insurance is necessary for you is to consider the down payment you initially put on the vehicle. If it was a high amount, then you owe far less than the value of the car. At that point, a gap insurance payout wouldn’t be that much or worth the premiums.

Some specific cases where gap insurance might be necessary are:

  • Little or no down payment.
  • Loan, which will be long-term.
  • Car depreciation occurs quickly, usually sports cars.
  • A lot of miles will be recorded on the car.
  • The lease is active for a certain amount of years.

Do Drivers With Gap Insurance Need Full Auto Coverage?

48 out of 50 states require their drivers to carry liability auto insurance. This is a must and is referred to as basic auto insurance. Full auto insurance is when comprehensive and collision insurance are added to the policy. Normally these types of coverages aren’t legally required, but if you are leasing your car, then you may be required by the leasing company to get full coverage insurance. This is mainly so that they won’t be on the line for auto repairs, and then you won’t be either. So, yes, drivers with gap insurance typically need full auto coverage.

How Does Car Depreciation Work?

A subject to briefly take note of how it functions in relation to gap insurance is how a car’s value depreciates over time. A car’s actual cash value, the amount it’s worth at the present time, begins to decrease the moment it is driven off the dealer or leasing lot. Into a year of ownership, a car’s actual cash value can decrease by at least 20%. This matters because the difference between your car’s actual cash value and how much you have remaining on your loan payments is what gap insurance will pay out if you total your car.

How Are Gap Insurance Claims Filed?

Filing an insurance claim is dependent on who is at fault for damages and their insurance provider. When it comes to gap insurance, drivers must contact their insurer who provides the gap policy.

In order to file a gap insurance claim, you will need:

  • Gap contract - You signed a contract when you originally took out the gap policy with the provider. They should have a copy of this too.
  • Sales agreement from dealership - The sales agreement from when you got your car is naturally required to prove ownership.
  • Manufacturer’s invoice - This details the vehicle’s original value before you drove it off the lot and it began deprecating.
  • Finance contract - If you got an auto loan or have a lease, you’ll have to provide proof of the payment plan. Vehicle loans and leases are handled by banks, dealerships, or credit unions.
  • Car payment history - Since your car is leased or has a loan, you’ll have to provide records of the payments you’ve been making and how much you have remaining. Again, these records are handled by banks, dealerships, and credit unions.
  • Valuation report - The current valuation report of your car is available through your auto insurance provider.
  • Total loss check from insurer - In the event of a total loss, your standard auto insurance will pay out the car’s actual cash value. In order to receive the gap insurance payout, proof of this payout must be given.
  • Insurance settlement - This report breaks down the amount on the payout check and is also available from your auto insurance provider.
  • Police report - Every insurance claim requires a police report of the accident that resulted in the claim.

How is Gap Insurance Different From Loan/Lease Insurance?

Lease or loan insurance generally comes with limitations. A notable one is it only pays up to 25% over the actual cash value, which often leaves hundreds of dollars uninsured. The driver will also have to cover those remaining hundreds. There are some cases where a loan/lease policy would be a better value than gap insurance based on the value of the car. Some insurers or companies may use these two terms in tandem, but remember to note the small difference. Above all else, remember to always keep track or be in the loop about how much your car depreciates over the years. A car can lose more than 40% of their value in just two years if they are being used enough.

How Much Does Gap Insurance Cost?

Insurance companies are the best providers of gap insurance because of the cost. On average, an insurer will charge you anywhere from $200 and $300 in annual premiums. If this is the same insurer providing you with your standard auto coverage, you can get a bundling discount when taking out a gap policy with them. Meanwhile, a dealership or lending company charges anywhere from $500 to $700 annually for gap coverage. As with other types of insurance coverage, the cost can also depend on the car’s cash value, location, how old the car is, and claims history.

Where Can You Buy Gap Insurance?

Insurance companies offer the best value for gap coverage, as you can see in the previous section. It also makes the claims process easier by having a gap policy with your current auto insurance provider. Most national and local agencies offer gap coverage to their customers. However, there are instances where you can buy gap insurance from car dealerships and third-party lenders.

Banks and credit unions that finance your car are also reputable sources for gap insurance. At the end of the day, if your car had the sticker price of $80,000 and you only put down $5,000, you’re going to want to carry gap insurance until the payment plan is complete or the lease runs out if you have one. You never want to be stuck with payments towards a car you aren’t able to use anymore.