What Happens if Someone Else is Driving My Car and Gets in an Accident?
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What is Gap Insurance?

Gap insurance is an optional car insurance coverage that assists in paying off your car loan if the vehicle is totally damaged or stolen and you owe more than the vehicle’s decreased value. Gap insurance is also known as loan/ lease gap coverage. This kind of coverage is only offered if you are the only loan or leaseholder on a newer vehicle. Gap insurance assists in paying the gap among the depreciated value of the car and what’s still owed on the vehicle.

Why Do I Need Gap Insurance?

If you lease or finance a new vehicle, a lot of lenders will require you to have collision and comprehensive coverage on the vehicle’s insurance policy until the car loan is paid off.

Gap insurance is intended to be utilized in combination with collision coverage and/or comprehensive coverage. If there is a covered claim, your collision and/or comprehensive coverage assists in paying for the totaled or stolen car up to the depreciated value of it. As reported by the Insurance Information Institute when you drive a brand new car off of the lot, the value of it instantly depreciates. And, a lot of vehicles’ value decreases by about 20% in the first year it is owned.

However, what if you still owe more on the vehicle loan or lease than the car’s decreased value? This is what gap insurance is for.

When You May Need Gap Insurance

Gap insurance coverage applies if you’re upside down on the loan (meaning, you owe more than its worth) if the car is stolen or totaled. “Totaled” simply means the repair costs surpass the value of the car. Whether a vehicle is designated totaled is dependent on state laws and the discretion of your insurer.

How Does Gap Insurance Work?

Here’s an instance of how gap insurance could work: Say you purchased a brand new car for $25,000. You are still obligated to $20,000 on the auto loan if the car is totaled in a covered accident. The collision coverage pays the lender up to the totaled vehicle decreased value — say it’s valued at $19,000. If there is no gap insurance, the cost of $1,000 would come out of pocket to settle the auto loan on the totaled vehicle. If there is gap insurance, the insurer would assist in paying the $1,000.

Remember, in the above situation, the car insurance compensation goes entirely to the auto lender to pay off a vehicle that can no longer be driven. If you believe you would need assistance purchasing a new vehicle following yours being totaled, you may want to think about buying new car replacement coverage. Many insurers offer loan/ lease gap and new car replacement coverage combined, as a single addition to a vehicle’s policy for a brand new vehicle.

Is Gap Insurance Available After You Purchase A Car?

You might be able to acquire gap insurance after you purchase a car, subject to the model year of the car. Gap insurance is not only sold at vehicle dealerships — a lot of insurance companies provide gap insurance as part of a vehicle insurance policy. And, as reported by the Insurance Information Institute, purchasing gap coverage from an insurer usually is less costly than buying one from a dealership.

Many insurers have a requirement that your vehicle be brand new for you to buy gap insurance. That might mean:

  • That you’re the original vehicle owner of (you’re in possession of the original lease or loan on the vehicle)
  • That the vehicle isn’t older than 2 or 3 model years

Verify with your insurance company to find out what conditions are required for you to purchase gap insurance.

Is Gap Insurance Worth It?

If you are thinking about purchasing gap insurance, it’s important to not forget that this kind of coverage might only be available when you are leasing or financing a new can. Then, consider how much you owe on the vehicle loan versus how much the vehicle is worth. (You can find a ballpark figure about your vehicle’s value on a site such as Kelley Blue Book.) Are you owing more on the loan than the value of your car? Would you be able to afford to pay the difference on the loan by yourself if your vehicle is totaled?

As reported by the Insurance Information Institute, you might want to think about gap insurance if:

  • you put down less than 20% for your down payment
  • the vehicle loan is 60 months or longer
  • you are leasing a car. If you are leasing a new car, the Insurance Information Institute notes that a lot of lease agreements include gap coverage. Verify with your insurance to see if you are covered.

Auto Insurance Quotes

From offering liability protection to you and your family to helping you get reimbursed for personal property damage, auto insurance provides many types of coverage. Learn more about Auto Insurance Coverage or get a free auto insurance quote from Klimes Insurance today.

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