Also known as loan/lease payoff coverage, gap insurance is a special type of insurance for people who buy or lease a new or used vehicle. In some states, such as New York, gap insurance is automatically included within the cost of the lease. In other states, coverage is purchased separately.
as loan/lease payoff coverage, gap insurance is a special type of insurance for people who buy or lease a new or used vehicle. In some states, such as New York, gap insurance is automatically included within the cost of the lease. In other states, coverage is purchased separately.
How Gap Insurance Works
Gap insurance is designed to cover the gap that frequently exists between the value of a vehicle and the amount owed on a vehicle. Since vehicles are notorious for depreciating in value the second they are driven off a car lot, it stands to reason that there will be a gap between value and debt at some point–especially while the loan is new.
A traditional auto insurance policy will protect you up to a certain point if your vehicle is stolen or wrecked beyond repair. However, you will only receive a check for the value of the vehicle. If you owe more on the car than your insurance company says it is worth, you are simply out of luck. The extra money needed to pay your lender will have to come out of your pocket–unless you have a gap insurance policy. If you have gap coverage, the policy will pay your lender the difference between what you owe and what your vehicle is worth.
Who Needs Gap Insurance
Gap insurance is a great deal for some and a waste of money for others. The only people who really need gap insurance are those who will have a gap between what a vehicle is worth and how much is owed. Gaps can occur with zero-down loans or minimal down payments. High interest rates can also lead to gaps. If you traded in a vehicle and carried over an amount from an old loan onto your new loan, you will owe more than the new vehicle is worth for some time. Gap insurance will minimize the risk of having a large loan. As you pay down your loan, the need for gap insurance may decrease. You could always cancel your policy at this time. If you have never made a claim, you may be able to get a partial refund on your premiums.
What Gap Insurance Won’t Pay
Gap insurance will not cover you in every instance. Refinancing the vehicle loan after the gap coverage was purchased can void your policy. If you have unpaid delinquent payments, deferred payments, or late fees at the time of loss, these amounts will most likely be your responsibility. Some gap policies also have limits on the amount of money that can be paid out. For example, Progressive’s loan/lease payoff coverage stipulates a maximum payout of 25 percent of your vehicle’s value.
Buying Gap Insurance
If you buy or lease a new vehicle from a dealership, you will most likely be asked if you want to purchase gap insurance. Although there is nothing wrong with purchasing the policy offered by the dealership, you may be able to get a better deal by going through your normal insurance company. The policies sold by dealerships are often more expensive. Of course, you will want to compare more than just prices when shopping for gap insurance. Every company offers different levels of coverage. Claim rules can vary as well. Some insurance companies will only allow you to use your gap policy if your claim is covered under your comprehensive or collision coverage. Make sure you know what your policy covers before signing on the dotted line.
Guest post from Bailey Harris.