Gap Insurance Can Help Make Sure Your Car Is Paid Off After an Accident
If your insured car is totaled in an accident, or stolen and unrecovered, your auto insurance may give you a settlement based on the car’s actual cash value (ACV), not what you paid for it. Since cars depreciate in value quickly, your settlement may not cover what you still owe on your auto loan or lease.
That could leave you with no car and a big bill to pay. Gap coverage can help avoid this unhappy scenario. Here are the key facts about this important, optional coverage:
Gap insurance coverage adds more protection to your auto policy
Gap insurance is an optional insurance coverage for newer cars that can be added to your collision insurance policy. It may pay the difference between the balance of a lease or loan due on a vehicle and what your insurance company pays if the car is considered a covered total loss. Without proper coverage, the gap between what you’ve paid and what you owe can be substantial.
Your lender may require gap insurance
If you financed your vehicle with a car loan, your lender might require loan gap insurance in addition to your collision and comprehensive policies. If you lease your vehicle, lease gap insurance may already be included in the cost. Check your paperwork to be sure.
Actual cash value determines how much your policy pays
Standard collision and comprehensive car insurance policies help pay for the replacement of your vehicle if it’s a covered total loss – up to the limits of your policy and the car’s actual cash value. ACV is equal to the cost of the car when it was new, minus depreciation for age, mileage, physical condition and other factors.
After just a year, the ACV of your car can be thousands less than what you paid for it, which can leave you with an expensive loan or lease balance. Gap insurance may cover some, or all, of that amount. This coverage is available in select states and applies to vehicles 6 years old or less.
Let’s say your car cost $35,000 when new, and you currently owe $30,000. If the car is totaled, the ACV of the vehicle may be only $25,000. You have a deductible of $500, so the car accident settlement is $24,500. Your gap insurance may pay the remaining $5,500 on the loan instead of having to come up with the money yourself.