If you have a car loan or lease, you may have heard of gap insurance. Gap insurance is a type of optional car insurance coverage that can help you pay off your remaining balance if your car is totaled or stolen and you owe more than what it’s worth. But how does gap insurance work after a car is totaled?
In this article, we’ll explain what gap insurance is, how it works, and what are its benefits and limitations.
Understanding Gap Insurance
Definition of Gap Insurance
Gap insurance stands for Guaranteed Asset Protection. It’s optional coverage that you can add to your comprehensive and collision insurance policy. Comprehensive and collision insurance are the types of coverage that pay for damage to your car after things like accidents, fire, or theft. However, they only pay up to the actual cash value (ACV) of your car at the time of the loss. This means that if your car depreciates faster than you pay off your loan or lease, you may end up owing more than what your car is worth. This difference between your car’s value and your loan or lease balance is called the gap.
Purpose of Gap Insurance
The purpose of gap insurance is to cover the gap in case your car is totaled or stolen. This way, you don’t have to pay out of pocket for the remaining balance of your loan or lease. Gap insurance can protect you from losing money on a car that you can no longer drive.
How Gap Insurance Works?
Gap insurance covers the difference between your car’s ACV and your loan or lease amount, less your deductible. The deductible is the out-of-pocket expense you must bear before your insurance kicks in. If your automobile is worth $15,000 but you owe $18,000, gap insurance will pay $2,500 ($18,000 – $15,000 – $500) to pay off your loan or lease.
What Happens After a Car Is Totaled?
Insurance Claims Process
If your car is totaled in an accident or stolen, you need to file a claim with your insurance company. Your insurance company will then determine whether your car is a total loss or not. A total loss means that the cost of repairing your car exceeds its ACV. If your car is a total loss, your insurance company will pay you the ACV of your car, minus your deductible.
Determining Actual Cash Value (ACV)
The ACV of your car is the amount that your car is worth at the time of the loss. Your insurance company will use various factors to calculate the ACV, such as the age, mileage, condition, and market value of your car. The ACV may differ from the original purchase price or the replacement cost of your car.
Calculating the Gap
To calculate the gap between your car’s value and your loan or lease balance, you need to subtract the ACV from the amount that you owe on your loan or lease. For example, if your car’s ACV is $15,000 and you owe $18,000 on it, the gap is $3,000 ($18,000 – $15,000).
Gap Insurance Coverage
If you have gap insurance and your car is totaled or stolen, your gap insurance will cover the gap between your car’s value and your loan or lease balance, minus your deductible. For example, if the gap is $3,000 and you have a $500 deductible, your gap insurance will pay $2,500 ($3,000 – $500) to help you pay off your loan or lease.
Benefits and Limitations of Gap Insurance
Benefits of Gap Insurance
The main benefit of gap insurance is that it can save you from paying a large amount of money for a car that you no longer have. Gap insurance can also give you peace of mind and financial security in case of a total loss. Gap insurance can be especially useful in these situations:
- You’re leasing your car: Leasing companies may require you to have gap insurance as part of your lease agreement.
- You’re financing a new or expensive car: New or expensive cars tend to depreciate faster than older or cheaper cars.
- You’re making a small down payment or a long-term loan: A small down payment or a long-term loan means that you have less equity in your car and more debt to pay off.
- You’re driving a lot of miles: Driving a lot of miles can lower the value of your car faster than normal wear and tear.
Limitations of Gap Insurance
Gap insurance also has some limitations that you should be aware of before buying it. Some of these limitations are:
- Gap insurance doesn’t cover everything: Gap insurance only covers the difference between your car’s value and your loan or lease balance. It doesn’t cover other expenses such as rental cars, towing fees, taxes, or fees related to your loan or lease.
- Gap insurance doesn’t apply to all types of losses: Gap insurance only applies to total losses caused by accidents or theft. It doesn’t apply to partial losses or mechanical breakdowns.
- Gap insurance may have a limit: Some gap insurance policies may have a limit on how much they will pay. For example, some policies may only pay up to 25% of your car’s value. If the gap is larger than that, you may still have to pay the difference.
- Gap insurance may not be available for all vehicles: Some gap insurance policies may not cover certain types of vehicles, such as motorcycles, RVs, or commercial vehicles.
- Gap insurance may not be necessary for everyone: If you don’t have a loan or lease, or if you owe less than what your car is worth, you don’t need gap insurance. You can also cancel your gap insurance once you reach a break-even point where your car’s value and your loan or lease balance are equal.