Gap Coverage

We call it gap insurance. Maybe that’s misleading.

Questions received by CarInsurance.com show that there is a huge misconception about what gap insurance really covers. Many car owners believe gap insurance is a catch-all policy that makes their car payments anytime they’re unable to. That is not the case.

Gap insurance does not cover:

  • car payments in case of financial hardship, job loss, disability or death
  • repairs to your vehicle
  • the value of your car or balance of a loan if your car is repossessed
  • a rental car while your vehicle is in the shop
  • the diminished value of your car after an accident
  • a down payment for a new car
  • carry-over balances on any loans you rolled over into your new car loan
  • extended warranties you add to your car loan

In short, gap insurance isn’t “super coverage” that protects you if you don’t have the best auto insurance coverage or can’t pay on your loan.

What does gap insurance do? It pays the difference, in the event of a total loss, between what you owe on the car and what it is worth in an insurance company’s eyes. That’s it.

But that’s a bigger deal than you might think.

When you need gap insurance, and why

According to Edmunds.com, the average new car depreciates 11 percent as soon as it leaves the dealer’s lot. After a year, it’s worth 20 percent less than new.

If you didn’t put much down and had your taxes and licensing fees rolled into your loan, you could be upside-down (owe more than car’s worth) before you are a block from the dealership.

For instance: You buy a car that stickers for $24,000 and rolls out the door with taxes and fees for $26,500. You put down only $1,000, sign your financing papers, get a car insurance policy and drive off the lot.

Nearly a year later, your “new car” is totaled out. You file a collision claim with your insurer and find out that the actual cash value of your vehicle is only $19,200. This means after your $500 deductible is taken out, your car insurance company will pay out $18,700 to your lienholder.

You still owe $23,500 on the car, so you’re left with a “gap” of $4,800.

With a gap insurance policy that includes coverage for your deductible, this whole amount would be covered. If you didn’t get gap insurance, you’re left paying the difference out of your own pocket for a car you no longer have – and that hurts, because you’ve got to buy another car, too.

Gap is actually an acronym, meaning “guaranteed auto protection” or “guaranteed asset protection.” Its function is to provide protection in the early years, when the loan exceeds the value of the car.

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