myth: gap insurance pays for any totaled car

Paying off a car loan? Make sure you're adequately covered with gap insurance.

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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’s the “gap” in gap insurance?

Simply put, the gap is the difference between a car's actual cash value (ACV) and how much a driver owes on it. The gap develops due to depreciation. As you know, a car becomes "used," and therefore begins to depreciate, the moment you drive it out of the dealership.

Depreciation means that a car is worth significantly less than what you bought it for mere months after its purchase. If you purchase a car for $30,000, its value may have dropped to $26,000 just 2 months later — and if you've been making payments of $500 a month, that means you owe $3,000 more than it's actually worth. In the insurance world, that gap makes you "upside down" on your loan (another gem of actuarial idiom).

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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.

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