Gap insurance can provide valuable protection during the early years of your car's life if you have a loan or a lease.
If a loss occurs, gap insurance will pay the difference between the actual cash value (ACV) of the vehicle and the current outstanding balance on your loan or lease. Gap insurance protects your vehicle lease or loan. Sometimes it will also pay your regular insurance deductible.
If your vehicle has been totaled by accident, theft, fire, flood, tornado, vandalism, or hurricanes your insurance company typically pays the actual cash value. That may be less than its actual retail value. It is often considerably less than the actual amount you still owe on your loan or the amount due for a lease payoff.
The amount between your insurance deductible and the loss from this financial shortfall is the "gap" you can be left owing. (See "What gap insurance does -- and does not -- cover.")
[Let CarInsurance.com help you find affordable auto insurance now.] When you purchase your policy online with CarInsurance.com, most of our carriers offer this coverage. Our carriers sell this along with physical damage coverages as an added benefit or optional coverage. Typically, it is called Loan/Lease Coverage, Auto Loan/Lease Coverage, or Loan/Lease Payoff Coverage.
This is how a "gap" occurs (using fictitious numbers):
- You choose a car that costs $25,000 and you drive it off the lot.
- After paying the down payment you owe $24,000 in car payments over five years (0% interest loan = $400 car payments).
- You purchase physical damage insurance (comprehensive and collision) with a $500 deductible to protect you against damages and loss.
- You have an accident while you are still upside down on your loan or lease ("Upside down" means owing more on a car than it's worth) and your vehicle is totaled.
- The insurance company determines that the actual cash value of the car is only $22,000, but at the time of the loss you still owe $23,500.
- Gap insurance should pay the difference plus your deductible totaling $2000. (Not all gap policies pay the deductible)
Here are the line items:
- Loan payoff at the time of accident: $23,500
- Vehicle's actual value at the time of accident: $22,000
- Your deductible: $500
- Physical damage insurance company pays: $21,500 ($22,000 minus $500 deductible)
- Gap insurance pays the difference between what is owed and what the physical damage insurance company pays (plus your deductible): $2000
Typically a new car is worth approximately 30 percent less in three months than the day it was purchased. In our example above, if you owned the car for three days, had physical damage coverage and the car was totaled, you could owe 20% to 30% of the $24,000 ($4,800 to $7,200 out of your pocket) even though you purchased "full coverage."
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. This is not so. Many car insurance companies offer a gap option (loan/lease gap insurance) as an optional coverage that is available with physical damage coverage. Typically, a stand-alone gap policy is sold by a car dealer.
Can I get gap insurance without primary insurance?
Even if you get gap insurance, you still need your state's minimum auto insurance coverage (the insurance coverage the police check for if you are stopped and asked for your insurance card).
In fact while the state requires you to have certain car insurance coverages, typically at least bodily injury liability and property damage liability, for your gap insurance to even be effective you would also need to have physical damage coverages of collision and comprehensive on your vehicle as well. This "full coverage" of Liability and physical damage coverages is also normally required by your lien holder.
When did gap insurance start?
Gap insurance began to be offered in the early 1980s to help those insured who purchased a car and due to rapid depreciation of the vehicle found themselves owning more than the car was worth if it was in a total loss situation.
The higher price of motor vehicles, longer-term auto loans, and the increasing popularity of leasing in the 1980s is what created gap protection as a type of insurance for car owners.
What does gap stand for?
GAP stands for Guaranteed Auto Protection.
Can I get gap insurance on a loan that is not specifically used for a vehicle like a Home Equity Line of Credit (HELOC)?
You cannot get gap insurance for lines of credit that may be used for purposes other than a vehicle. Gap insurance does not work with mortgage loans, credit lines, balloon payments or other types of non-vehicle specific loans. If you have used money from your Home Equity Line of Credit (HELOC) to purchase your vehicle, gap insurance would not cover this type of loan since the HELOC is not specifically to be used for a vehicle loan. With this loan type the GAP insurer would have to use your accounting of what was used for the vehicle and what was still due on the line of credit for it and what was used for other items and what you had paid back already, etc. Your accounting of what is due is not a risk a gap insurer is going to take on.
Gap insurance is normally able to be used when you have received your money through a conventional auto loan or lease to obtain your vehicle.
Can I buy gap insurance for a car that I bought, if a private person is holding the loan?
No, gap insurance providers would not normally offer its coverage if your loan is through a private individual instead of a proven financial institution such as a bank or finance company. With a private person there is not a structured loan of a financial institute that a gap insurance company requires.
When dealing with a bank or finance company the gap insurance carrier knows the terms, sees the paperwork, etc. With a private party loan it is hard for the gap carrier to be assured that the loan is only for the vehicle, that payments were made properly, etc.
Is gap insurance an acceptable proof of insurance at the DMV or for Police?
Gap insurance would not normally be accepted by a Department of Motor Vehicles as proof of insurance on a vehicle when you are going to renew your registration.
Showing proof of gap insurance to law enforcement would not help you in any way if they ask you for proof of insurance since it is optional coverage that only helps you out in a total loss situation. This does not provide the Liability coverage that police are trying to check that you have on your vehicle.
If I bought my car outright, do I need gap insurance?
If you bought a car with cash and thus did not have a lien holder due to no loan or lease on the vehicle there would not be a reason for you to obtain gap insurance. Gap insurance is for when you owe more than the value of your vehicle. If you have the car paid off because you bought it with cash instead of financing it then you do not owe anyone an amount more than the car's worth.
How long do I have to buy gap insurance?
Gap insurance providers' terms and guidelines differ; in general gap insurance is available on new, used and refinanced cars, trucks and SUV’s leased, purchased or refinanced within the past 12 months. So if you know after leasing or refinancing of your vehicle that you owe more than its actual cash value (ACV) then gap insurance could be beneficial to you.
Is gap insurance transferable from one vehicle to another?
Gap insurance is not normally transferable from one vehicle to another. Gap insurance cannot be transferred to a different vehicle or loan. Gap applies to a specific loan or lease and is non-transferable. If you are trading in a vehicle or selling a vehicle and getting a new one you can get a new policy to cover the newly financed vehicle.
Is gap insurance transferrable after a refinancing?
If you already had a gap policy in place then normally that gap insurance would be voided out when you refinance a vehicle so you would need to get a new gap insurance policy on it.
If I paid a high down payment, do I need gap insurance?
So as in your example, if you put down a decent down payment and your vehicle depreciates at a steady, usual pace and you are paying down the balance of the loan each month then typically you would not need gap insurance coverage. Gap insurance is only needed 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.
Does gap insurance come with a deductible?
No, gap insurance does not normally come with a deductible attached to it.
Will gap insurance pay your physical damage deductible (collision or comprehensive coverage)?
The answer is it depends upon your gap insurance policy. Some policies pay the deductible and some don't. When gap insurance pays the primary insurance deductible amount, the deductible amount is not actually reimbursed back to you. Rather, the primary insurance deductible is deducted from the payout of your totaled vehicle and covered as part of your unpaid loan balance that gap insurance pays.
Is gap insurance required by law?
While gap insurance is wise to have if you owe more on a vehicle then the actual cash value (ACV) you would be paid out in an insurance settlement, normally neither a dealership nor lien holder will require you to have it either. It should be your choice if you want this extra coverage.
If a lender of leased cars requires gap insurance to be purchased then they must include the gap insurance within the cost of the lease itself. This means that the monthly price quoted by the dealer must include gap insurance when they require this coverage. It is common for lease contracts to have gap insurance.
Perhaps some financial institutions will want you to have gap as part of your insurance coverage on the car you are purchasing. If this is the case, your loan or lease papers should note this.
If you have declined gap insurance the dealer should not be able to add it on to your loan amount or charge you for it in another way. Even though gap insurance may be helpful to you, if you owe more on the vehicle then its actual cash value (ACV) and were to be in an accident, you should have the right to turn down this coverage and thus not be charged for it.
The Car Buyer’s Bill of Rights requires disclosure of the price of items commonly packed into loans, such as theft etching on windows and other car parts, gap insurance, or extended service contracts. Dealers now must provide an itemized price list for all these items, such as warranties and insurance, etc., if the items are being financed.
If you do not wish to have gap insurance coverage, discuss the matter first with the financing company that added into your payment. Unless you signed paperwork stating that you would add GAP coverage to the car at the time of purchase as part of your finance or purchase agreement you should be able to decline it.
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If you do not want gap insurance and have problems getting it removed, try contacting your state agency's consumer division. The office of the insurance regulator may be able to help.
What is a gap waiver?
A gap waiver is different in that it is an agreement under which the creditor agrees to waive the lessee or debtor’s obligation for the difference between the "gap amount" and the actual cash value (ACV) of the property. On a leased car, the cost of gap insurance or waiver is generally rolled into the lease payments.
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