GAP Insurance, What Is It And Do I Need It?
Gap insurance is a type of motor vehicle insurance. This type of coverage comes into play if your car is totaled in an accident. Gap insurance is an optional coverage that will pay the difference between the actual cash value of your car and the amount you still owe on a lease or loan. This can be important, as many people often owe more on a vehicle that what it is worth after it starts to depreciate or lose value. If your car is totaled in an accident and you owe more on the loan that the car is worth, gap insurance or gap coverage can help pay that difference.
If your car is fully paid off and you do not owe any loans, gap insurance would not be necessary.
What Is Actual Cash Value?
Generally, an insurance policy will only pay the actual cash value of a car if it is totaled. In other words, an insurance company will pay the amount of money the car is worth on the market at the time of an accident. Actual cash value, often abbreviated as ACV, is equal to the cost of the car when it was new, minus depreciation for its age, mileage, the physical condition and other factors. If the actual cash value of the car is less than what you still owe on a loan or lease, you will only get the actual cash value of the car and still be responsible for making the car payments above that amount. Gap insurance can help pay for the difference to minimize your economic losses.
An Example Of How Gap Insurance Works
Here is a simplified example. Assume a person buys a car for $20,000. The person takes out a loan for five years. After one year, the person still owes $16,000 on the loan. However, the car is then totaled in a car accident. Due to depreciation, at the time of the accident, the car is only worth $14,000 on the market. A typical auto insurance policy will only pay the actual cash value of the car, which is $14,000. Yet the driver still owes $16,000 on the loan. This would mean that the driver is still responsible for an additional $2,000 in loan payments on a car that has been demolished. The driver is left with no car and still owes thousands of dollars.
If the person had gap insurance or gap coverage, then that optional insurance coverage should pay the extra $2,000 so that the person is not out of pocket several thousand dollars.
Gap Coverage May Be Required By Lenders
Certain lenders may require gap insurance or gap coverage. This can be common when lenders extend an auto loan, and is almost always required if a car is leased. This type of coverage protects lenders by ensuring that they will be paid the amount owed to them on the loan or lease, even if the actual cash value of the car is less than the balance of the loan. This coverage also protects drivers as they will not owe money on a car that they can no longer drive.
Drivers should check to ensure that they have gap coverage if it is required by their loan or lease agreement.
Also, some auto policies may have gap coverage included in their policy coverage, or it can be added for a nominal extra premium. If you are buying a car, it is generally wise to see how much gap insurance would be through your auto insurance. At times, car dealerships may add gap insurance to the cost of an auto loan. Drivers should determine which coverage is more cost-effective, whether getting gap insurance through the driver’s own insurance carrier or potentially buying it through the auto loan.
Ask Your Insurance Company Or An Attorney
If you have questions about gap insurance, contact your insurance company or contact our office today if you have any questions regarding this type of insurance.