Gap insurance is an important type of insurance for drivers who want to protect their financial wellbeing and have a loan or lease on a newer car. 

What is gap insurance? Also known as loan-lease payoff coverage, gap car insurance will pay off the difference between what your insurance company will determine your car’s worth is and your loan amount. 

This, of course, assumes that you carry enough comprehensive and collision insurance to start with. Use this guide, “how much insurance do I need?” to determine if you are in the right ballpark with your basic insurance plan that would cover medical bills and lost wages if you are in a car accident. In a serious car accident, medical bills can run into the tens and even hundreds of thousands of dollars. Your comp and collision coverage is going to need to cover these kinds of events.

But let’s say your vehicle has been totaled in an accident, or theft, fire, flood, or an earthquake destroyed it. Your insurance company will pay you the actual cash value – ACV – of your car. Often, this amount is less than the current outstanding balance on a loan or lease. You would then be stuck with a situation where you still have to pay for your car loan without having that car anymore, and needing to find another one. Hence, a “gap” yawns open and swallows your financial well being.

Gap insurance will save the day. 

Here’s another example, using real numbers to illustrate this idea. Let’s say you purchase a car that costs $25,000. You drive it off the lot after paying the down payment of $1000. While waiting for your loan to go through, you purchase physical damage insurance, aka comprehensive and collision, with a $500 deductible to protect you against damage and loss. 

The next day, you are in a distracted driving car accident, and your vehicle is a total loss. You still owe $24,000. 

The insurance company decides that your vehicle, in your zip code and in the current market, is really only worth $22,000. But you still owe the car dealer $24,000. You have a gap of $2,000. 

Luckily, you bought gap insurance. It will cover the gap of $2,000. 

It’s an unfortunate fact that cars depreciate the moment they leave the sales lot. A new car can be worth 10% less than what its owner just paid. 

It’s likely that your car dealer will offer you gap insurance through their finance program, assuming they have something like that. You may want to check around different insurance companies and get a few numbers. You may be able to find gap insurance through different insurers for a fairly low cost. It will only be necessary to carry this insurance until the gap closes. Once you’ve paid much of the interest and/or you’ve paid a good chunk of the loan, it’s likely your car’s ACV will be higher than your loan balance. Your insurance agent will be able to give you a better idea of what you should consider.

For more on gap insurance, follow this link: Gap insurance: do you need it?

How to determine the Actual Cash Value of your vehicle: a guide.


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