Collision and comprehensive auto insurance coverage pays for the replacement of your vehicle if it is deemed a “total loss”—up to your policy limit and the vehicle’s actual cash value (ACV). The ACV is calculated by taking the cost of the vehicle when it was new and deducting the cost equivalent of depreciation factors such as age, condition, and mileage.
Being limited by your vehicle’s ACV can be an issue if your vehicle is totaled (or stolen and unrecovered) and you owe more on your vehicle than what your insurance policy allows to be paid out for the claim. Cars depreciate the moment they leave the lot, sometimes as much as thousands of dollars each year. This gap between what you are paid by your insurance for the ACV (or policy limit if it is less) and what you still owe on your car is still your responsibility.
This means there is a risk of you being out of a car and being stuck with part of the bill! That’s why many car dealerships and auto insurance carriers recommend Gap Insurance.
What is Gap Insurance?
Gap insurance is optional*, but it is aptly named. It is an add-on coverage to help protect you against the above scenario. Literally, helping to cover the gap between what you owe and what you may be paid out on a totaled vehicle.
*Some lenders may require gap insurance to be purchased as part of the sale agreement if the vehicle was financed in full or did not have enough of a down payment. Lenders may also require other types of insurance coverages, like collision and comprehensive policies.
What Does Gap Insurance Cover?
Gap insurance can be applied if your vehicle is considered a “total loss”—the repairs would cost more than the value of the vehicle or the damage is too great to attempt the repair—from an accident, not from engine failure or other mechanical issue that prevents your car from starting. It can also be used if your vehicle is stolen and is not recovered.
Gap insurance is only applied to the gap in the damage/loss of the vehicle. It cannot be applied to a “gap” in coverage for personal injuries or property damage.
If you have to use your gap insurance (along with your collision/comprehensive policy), you are still responsible for your deductible.
Who is Gap Insurance Best For?
Gap insurance is something to consider if you are leasing your vehicle, have recently purchased your vehicle by financing it with a lender, are still making payments on your financed vehicle but are “upside down” on it (meaning, you owe more than the value of your vehicle), or your lender requires you to carry gap insurance.