What is GAP and why should you get it?
So you just bought this amazing new car off the lot and are feeling pretty fancy in your new ride. You're turning heads, playing your music loud, and are riding in style. You have worked so hard to get here, and finally are seeing the rewards for all your hard work. Then, the unthinkable happens. Someone runs a red light and T-bones your new car. It is totaled. With the financing charges, the insurance is only going to pay 3/4 of the amount owed. So now you are left with this balance and no vehicle..... and a wounded pride.
Gap insurance is optional coverage that helps bridge the financial gap for drivers whose car loan balance is more than what their vehicle is worth if it’s totaled.
How Does Gap Insurance Work?
If your vehicle is totaled in a situation covered by collison or comprehensive coverage, the maximum claim payout from your insurer is the value of the vehicle right before the incident. Gap insurance, sometimes called loan/lease coverage, covers the difference between what you owe and the value of your totaled or stolen vehicle.
You must have collision and comprehensive insurance in order to buy gap coverage.
Here’s how a typical gap insurance claim works:
If your vehicle is stolen or totaled in an accident covered by your auto insurance, you’ll make a claim on either the collision or comprehensive insurance portion of your policy (whichever coverage applies). Your insurer will pay your lender the actual value of your car. If you owe more on your loan than the ACV, gap insurance can cover the difference.
If you don’t have gap insurance and the outstanding balance of your loan or lease is more than your car’s value, you’ll be responsible for paying off the rest of the loan yourself.
Does Gap Insurance Cover Theft?
Yes, gap insurance will pay if your car is stolen.
Does Gap Insurance Cover Engine or Transmission Failure?
No . Gap insurance doesn’t cover engine or any other mechanical failure. Gap insurance only pays out after a total loss of your vehicle, such as an auto accident or theft of your car. Mechanical issues on their own are not covered by car insurance or gap insurance.
Does Gap Insurance Cover Death?
No. Gap insurance coverage strictly pays out based on the total loss of your vehicle and doesn’t cover injuries, death or funeral costs.
The liability portion of a car insurance policy covers accidental death to others. If you have personal injury protection or medical payments coverage it can cover funeral fees for you and your passengers.
What Doesn’t Gap Insurance Cover?
Here are some common expenses gap insurance doesn’t cover:
Your car insurance deductible.
Overdue payments and late fees on your car loan or lease.
Security deposits.
Extended warranties.
Carry-over balances from previous loans or leases.
Lease penalties for high mileage or excessive use.
Charges for credit insurance connected to the loan.
A down payment for a new car.
Do I Need Gap Insurance?
Whether you need gap insurance depends on how much you have left on your car loan or lease and what the vehicle is worth. If you have enough money not to care about the “gap,” you likely don’t need gap insurance.
You lease your car.
You took out a car loan of five years (60 months) or longer.
You financed most of the car and made a small down payment of your car of less than 20%.
You rolled negative equity from your last car loan into your new car loan (make sure you get a policy that covers negative equity).
You bought a vehicle that depreciates in value faster than other vehicles (more on that below).
If you currently have a car loan or lease, you can check the value of your car on a website such as J.D. Power or Kelley Blue Book and compare it to your car loan/lease balance. The difference between the two is the gap.
Gap Insurance May Not Make Sense If…
The amount you owe is less than the car’s value, or only a little more.
You can afford to pay the difference between the amount owed and the car’s value.
Once the amount you owe is less than the car’s value, or only a little more, there’s no reason to keep gap insurance. That’s because there will be little or no gap insurance payout possible. For example, if you owe $15,000 and your car’s value is $17,000, there won’t be a gap if your car is totaled or stolen.
And if you sell your car, you should cancel gap insurance.
