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Gap: What you need to know

Car owners often assume that if their car is totaled, it will be replaced at the amount they paid, or at least the amount they owe, by their car insurance company. This is not always so.

Most car insurance policies will pay only up to the actual cash value of the car -- what it was worth right before the accident. That will almost certainly be less than you paid, and in many cases it can be less than you owe. Negative equity has become more common as auto loans have lengthened to 60 months, 72 months and even longer. Cars depreciate more rapidly than the loan balance shrinks, leaving owners “upside down” in their cars -- and on the hook if the car is totaled.

Many car insurance companies offer gap insurance (sometimes called loan/lease gap, or LLG) so that if you have negative equity in your vehicle when it is totaled, you’re not left owing money to your lien holder. Many car dealers and banks will offer you the coverage as well, but it’s typically much cheaper to buy it from your insurance company.

Gap insurance isn’t required by law. Lenders will usually require gap insurance on their lease contracts, but it’s less common for them to ask for it on loans. The dealer cannot require it (unless, of course, it is also the lender.)

Buy gap insurance if you have a long loan or a small down payment. If you have both, it’s an absolute must.

Here are the most common questions we see about gap insurance. If you don’t see the answer to your question here, search to see if we have already answered your car insurance question. If not, you can ask your own question.

Top GAP Insurance Questions

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How does gap insurance work?

Gap insurance pays the difference between the actual cash value (ACV) of your vehicle and the current outstanding balance on your loan or lease -- but only if you owe more than the value of the car and it’s been declared a total loss.  Sometimes it will also pay your regular insurance deductible.

If your insurance company totals your vehicle, your physical damage coverages should pay for the car's actual cash value. If the ACV is less than you still owe on your loan or the amount due for a lease payoff, the shortfall is the "gap" your gap insurance would pay.

For example, say you’ve totaled your car and your loan payoff at the time of the accident is $23,500.  The insurance company finds your vehicle’s ACV to be $22,000, and you have a $500 deductible.  This means your insurance company pays your lien holder only $21,500, leaving you to pay the remaining $2,000.  If you have gap insurance, it would pay that $2,000 difference for you.

Read more: What gap insurance does -- and does not -- cover

Do I need full coverage to get gap insurance?

Yes, you need to have not only state-mandated bodily injury and property damage liability coverages on your car, but also the physical damage coverages of collision and comprehensive on your car to buy gap insurance.  Gap insurance providers require that you have physical damage coverages on your car, since those are the coverages that will pay out the actual cash value (ACV) of your vehicle if it is totaled out. 

Gap insurance pays only the difference between the ACV and the balance of your loan or lease payoff. So if you don’t have collision or comprehensive to pay off the ACV, your gap insurance will not normally pay out after the total loss of your car.

Read more: What is full coverage auto insurance?

Does gap insurance come with a deductible?

No, gap insurance does not usually have a deductible. 

Read more: ‘Disappearing deductible’ car insurance: What’s the catch?

Does a gap insurance policy have a maximum payout or other limitations?

Most gap policies cover loans only up to a certain threshold, usually $100,000, and the maximum loss is typically capped as well, often at $50,000. The most common exclusions for a gap insurance policy or payout include:

  • Original loan amounts that exceed 120 percent of MSRP (new vehicle) or NADA retail value (used vehicles), plus 30 percent of value allowable for additional financed items like credit life or service contracts.
  • Late charges or other penalties due to your lender.
  • Loan terms greater than 84 months.
  • A balloon payment at the end of the term.
How long do I have to buy gap insurance after I buy a vehicle?

Gap insurance typically is available on new, used and refinanced cars, trucks and SUVs leased, purchased or refinanced within the past 12 months. So, if you know after buying, leasing or refinancing of a vehicle that you owe more than its actual cash value (ACV), then gap insurance could be beneficial to you.

Read more: How can I find the actual cash value of my vehicle?

Does gap insurance cover repairs to your car? A rental car? A repossessed car?

In all three cases, the answer is no.

You would need mechanical breakdown insurance (MBI) for repairs to your car that are not due to a covered accident, and thus not covered by collision or comprehensive coverage.

If your car is in the shop due an insured accident, then you would need rental car reimbursement coverage from your primary car insurance company in order to have coverage for the cost of a rental car while your car is being repaired. 

Repossession isn’t covered, either. Gap insurance pays out only if your car is in a covered accident in which it is deemed a total loss.  Then it will pay out the balance owed to your lien holder, after your primary insurer pays out the actual cash value of the vehicle.

Will gap insurance pay for the diminished value of my car?

No.  The perceived loss in market value (diminished value) of your car after an accident is not covered by gap insurance. Gap insurance only pays out if your car is a total loss and you owe more to your lien holder than the actual cash value (ACV) settlement that your primary insurer pays out.

With diminished value, your car has been in an accident and fixed, but you are concerned that the car has lost some of its resale value. That is not something for which gap insurance would pay, and in many states your primary insurance will not pay, either, due to exclusions listed on your policy.

Read more: What is diminished value?

Does gap insurance cover car payments if your car is not a total loss?

No.  Gap insurance pays only the difference between the actual cash value paid out for your vehicle by your insurer and the amount you owe to your lien holder when your vehicle has been declared a total loss. 

Gap insurance does not pay your car payments (or pay off your car) in case of job loss, disability, other financial hardships or death.

Read more: ‘Accident forgiveness’ car insurance: What’s the catch?

Can I get gap insurance on a private loan or home equity loan that I used to buy my car?

Gap insurance does not work with mortgage loans, credit lines, balloon payments, personal loans or other types of non-vehicle-specific loans. 

Will gap insurance pay for my down payment on a new car?

No. Gap insurance only pays for the balance on your current car’s loan or lease if your car is totaled out and you owe more than the ACV paid out by your insurer for your car.  Extra monies for a down payment aren’t one of the benefits of gap insurance.

If I paid a high down payment, do I need gap insurance?

You probably don’t need gap if you put a lot of money down on your vehicle.  If you are paying on your car each month and it depreciates at a normal, steady pace, gap insurance usually wouldn’t be needed.

Gap insurance is needed only if you owe more than the value of the vehicle because this coverage pays for the balance of the loan left after the actual cash value (ACV) is paid out after a total loss of the vehicle.  To see if you need gap insurance, determine the value of your car and compare it to what you still owe.  If you owe less than or the same as your car’s ACV, there is no need for gap insurance.

Why didn’t gap insurance cover my total loan amount?

Probably you rolled miscellaneous items into your car loan, such as an extended warranty. Your gap insurance strictly goes toward paying off the amount you owe on the vehicle itself.

You should not expect gap insurance to pay for:

  • Overdue lease/loan payments
  • Financial penalties imposed under a lease for excessive use
  • Security deposits not refunded by the lessor
  • Costs for extended warranties, credit life insurance, or other insurance purchased with the loan or lease
  • Amounts deducted by the primary insurer for wear and tear, prior damage, towing and storage
  • Carry-over balances from previous loans or leases
  • Equipment added to the car by the buyer, meaning that only factory-installed equipment is covered

Read more: Will comprehensive insurance cover my rims and body kit?

Is gap insurance transferrable?

No. If you already had a gap policy in place, then normally that gap insurance would be voided out when you refinance a vehicle or trade for another one.  Gap insurance also doesn’t cover carry-over balances on any loans you rolled over into a new car loan.

If you refinance your vehicle, you need to get a new gap insurance policy on it if you still owe more than it is worth. If you are trading or selling a vehicle, you can get a new policy to cover any newly financed vehicle.

If I bought my car outright, do I need gap insurance?

No. If you bought a car with cash, and thus don’t have a lien holder to which you owe money for the vehicle, there would be no reason to purchase gap insurance.  Gap insurance is only for car owners who owe more than the value of their vehicles to a lien holder. 

Read more: What auto insurance am I required to buy?

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