Gap insurance (or gap coverage) is a vital car insurance feature for those who need it. But many drivers believe it'll pay for any totaled car, regardless of its age or the amount owed on it. The truth is different.
gap insurance exists for drivers with specific needs
Gap coverage exists to protect 2 specific types of drivers against the costs of a total loss: those who are financing, and those who are leasing. If you own your car free and clear, or owe less on your loan than the car is worth, you don't need gap insurance.
what is gap insurance?
Gap insurance helps pay the "gap" between what you owe on a car and what it's currently worth. A new car becomes "used," and therefore begins to depreciate, the moment you drive it out of the dealership.
Depreciation just means that a car is worth less than what you bought it for. So if you purchase a car for $30,000, its value might drop to $26,000 just two months later. And if you've been making payments of $500 a month, then that means you owe $3,000 more than it's actually worth.
owing more than your car is worth
For many, owing more than the value of your car is simply a fact of car ownership. But for those who experience a total loss — i.e., those whose car is stolen or demolished in a wreck — owing more on your loan than your car is worth is a big problem.
Why? Because if your car is deemed a total loss while you owe more than its value, your car insurance company won't pay off your loan in full. Instead, they'll pay the car's ACV: its sticker price minus depreciation. For some, that means owing several thousand dollars on a loan for a car that doesn't exist anymore — unless they purchased gap coverage.
beyond the gap
If you've paid off enough of your car loan that you owe less than it's worth, you don't need gap coverage. In fact, if you've got comprehensive and collision coverage, you've got all the insurance you need to pay off your loan.
Let's say you owe $12,000 on a Kia Sedona worth $18,000 at the time a reckless driver totals it in a late-night collision. You weren't at fault, so you file a claim and your car insurance company pays off its actual cash value, giving you the 12 grand you need to cover your loan, leaving you $6,000 minus your deductible (which explains why a low deductible is a nice thing to have). While that obviously won't buy another Sedona, it'll help.
And if you own your car free and clear when it's totaled, you may well get enough to actually replace it.
gap insurance won’t help pay for any totaled car
Now you know: gap insurance, while vital for those who are leasing or financing and owe more than their car is worth, is a non-issue for other drivers. If you've transcended the gap already, comprehensive and collision coverage will be all you need to cover the costs of a total loss.
If you're leasing or purchasing a new financed car, Esurance will be happy to provide you with our loan-lease gap coverage (or auto loan/lease coverage). This coverage can pay up to 25 percent of the ACV of a totaled car, and you can easily add it to your policy when you get your quote.
is gap insurance worth it?
If you're leasing or financing a car, yes. Absolutely. In fact, not only is gap coverage worth it, it might be required by the dealership or your finance company. And for good reason.
Say you financed that $30,000 car with $1,000 down . That leaves a remainder of $29,000 that you owe. But your car is depreciating in value every day.
Now, say you have comp and collision but no gap insurance. Months later your ride is totaled in an accident. You file a claim. Boom — your insurer covers the ride's actual cash value. But that doesn't include what you still owe on it. So if your remaining balance is $25,000 and your car's now worth $21,000, you'd be $4,000 in the lurch — for a car you no longer have.
That's where gap insurance is oh-so worth it.
how to tell if you have gap insurance
Check with your insurer. They can help figure out whether you have it and whether or not you even need it. Also, review your leasing contract to see if it already includes gap coverage. If it doesn't, you may want to add it to your car insurance ASAP.
how to get gap insurance
You can get gap coverage from your insurer or the dealership. Just know that it typically costs a lot more at dealerships and yours may ask you to pay it all upfront.
Additionally, many insurance companies will offer a variant of gap insurance called loan/lease coverage. It's usually less expensive than gap insurance, but it provides a certain percentage of your car's actual cash value, which may or may not be enough, depending on how much you still owe.
If you're leasing or financing, don't miss this article on the most important car insurance coverage you may not know.
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