Gap insurance coverage
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What's gap insurance coverage?
Gap insurance helps pay the difference between what's owed on a vehicle loan and the actual value of it, if it's stolen or a total loss. This difference is what's referred to as the "gap".
In general, this "gap" occurs when you buy a new vehicle, the value (actual cash value) can start going down right away. This is what your car insurance covers, not what you owe on a loan. This is where gap insurance can help.
How does gap insurance work?
Let's say you buy a new vehicle with a $25,000 loan. You get into an accident and your vehicle is totaled. At the time of the accident, your vehicle is valued at $15,000 but you still owe $20,000 on your loan.
For a covered loss, you'd get paid for the value of your vehicle at the time of the incident ($15,000). This leaves $5,000 owed on your loan. With gap insurance, the difference would be covered, minus any deductible.
Please note, gap insurance coverage must be purchased at the same time as your car and you must be the car's first owner.
How much does gap insurance cost?
The cost of gap insurance depends on many factors. In general, the cost of gap insurance coverage varies based on
- Type of vehicle
- Actual cash value of the vehicle
- Where you buy the coverage (ex., insurance company, car dealer, or lender)
- Claim history, etc.
In general, gap insurance may be cheaper if you buy it through your car insurance company vs a car dealer or lender.
Frequently asked questions about gap insurance
Yes, gap insurance may cover theft if your car is stolen and unrecovered.
No. Gap insurance is only used in the event of a total loss from a covered accident or theft, not for mechanical repairs.
No. Even in the event of an accident covered by your gap insurance policy, you would still have to pay your deductible (the amount you pay out of pocket before your coverage kicks in). In other words, if the "gap" reimbursement amount is $4,000 and your deductible is $500, your total reimbursement amount would be $3,500.
No. Gap insurance is only for vehicle losses and doesn't cover bodily injuries, medical expenses, lost wages, or funeral costs.
Gap insurance provides a lot of benefits, but whether it's worth getting depends on you and your situation.
Reasons to consider buying gap insurance include
- Protection from your vehicle's value depreciating faster than you pay off your loan.
- Your lender might require it. Check your loan terms and make sure you're covered if needed.
- If you have a large loan or long-term financing, chances you'll owe more than your vehicle's worth are higher.
Negative equity is another term for when you owe more than your vehicle's current value. And yes, negative equity is covered by gap coverage.