What is Gap Insurance and How does it work

What is Gap insurance?

Gap insurance is a type of car insurance that covers the difference between the amount you owe on a financed vehicle and the car’s actual cash value in the event that the vehicle is totaled or stolen. This can be important because when you finance a car, the car’s value may decrease faster than you pay off the loan, leaving you owing more on the loan than the car is worth. Gap insurance can help to protect you from this financial loss.

Gap insurance is typically required by lenders if you finance a new vehicle, because the value of a new car depreciates quickly. However, gap insurance can also be purchased for used cars as well.

It is important to note that gap insurance only covers the difference between the car’s actual cash value and the amount you owe on the loan. It does not cover any additional costs such as rental car fees or transportation costs.

Additionally, gap insurance is typically only in effect for the first few years of the loan. Once you have paid off a significant portion of the loan, the gap between the car’s value and the amount you owe on the loan will decrease, making gap insurance unnecessary.

It is a good idea to check with your car insurance company as some of them include gap insurance as part of the standard coverage. It is also to check with your lender as they may require you to have gap insurance as a condition of the loan.

How Does It Work?

Gap insurance works by covering the difference, or “gap,” between the actual cash value (ACV) of a financed vehicle and the amount that is still owed on the loan or lease in the event that the vehicle is totaled or stolen.

For example, if you financed a new vehicle for $30,000 and after one year of ownership, it’s involved in an accident and deemed a total loss, the insurance company would determine the actual cash value of the vehicle to be $25,000. If you still owe $28,000 on the loan, there would be a “gap” of $3,000 between the ACV of the vehicle and the amount still owed on the loan. Gap insurance would cover this $3,000 difference.

The process of making a claim for gap insurance generally involves the following steps:

• Notify your insurance company of the accident or theft.

• Your insurance company will determine the actual cash value of the vehicle (usually by using a reputable industry guide such as Kelley Blue Book). Your insurance company will pay the actual cash value of the vehicle to the lender. The gap insurance provider will pay the difference between the actual cash value and the amount still owed on the loan.

• It’s important to note that gap insurance only covers the difference between the ACV of the vehicle and the amount still owed on the loan. It does not cover any additional costs such as rental car fees or transportation costs. Also, gap insurance is typically only in effect for the first few years of the loan, once you have paid off a significant portion of the loan, the gap between the car’s value and the amount you owe on the loan will decrease, making gap insurance unnecessary.

 FAQ

Q: What is gap insurance?

Ans: Gap insurance is a type of auto insurance that covers the difference between the amount you owe on your car loan or lease and the car’s actual cash value in the event that the car is stolen or totaled in an accident.

Q: Who needs gap insurance?

Ans: Gap insurance is typically recommended for individuals who are financing or leasing a new car, as their car will typically have a higher loan or lease balance than its actual cash value in the first few years of ownership.

Q: Is gap insurance required?

Ans: No, gap insurance is not required by law. However, some lenders or leasing companies may require it as a condition of the loan or lease.

Q: How much does gap insurance cost?

Ans: The cost of gap insurance can vary depending on factors such as the make and model of your car, the length of the loan or lease, and your coverage limits. Typically, gap insurance costs between $20 and $40 per year.

Q: How do I purchase gap insurance?

Ans: Gap insurance can be purchased through an auto insurance company, a car dealership, or a lender or leasing company. You can also add gap insurance to your existing auto insurance policy.