Gap insurance pays the difference between the actual cash value of a vehicle and the loan or lease balance, if the car is totaled or stolen. The main benefits of gap insurance are that it can prevent drivers from owing money to a lender or lessor after a car is totaled and that it is cheap to add to an insurance policy. It’s especially beneficial for cars that depreciate rapidly.
Benefits of Gap Insurance
Gap insurance can save you a lot of money if your financed or leased car gets totaled.
Adding gap insurance to an existing auto policy will usually cost just a few dollars per month. Gap coverage from a dealer is often overpriced, though.
Gap insurance can provide peace of mind when buying a new car, which is especially important if you saved up for a while to make the down payment.
On the other hand, the main drawback of gap insurance is that it’s a specialized type of coverage. It usually applies only if your car is totaled in a scenario covered by your comprehensive or collision insurance. If your car is damaged but not declared a total loss, gap insurance will not pay. Similarly, gap insurance does not apply if you are simply unable to make your car payments.
Scenarios When Gap Insurance Has the Most Benefits
Gap insurance is important for drivers who cannot afford to pay the remaining balance of their car loan or lease if their vehicle is totaled. Gap coverage also is a good investment for cars with low resale values, which are likely to produce a bigger gap if totaled. Drivers who take out long-term loans with a small down payment should consider purchasing gap insurance as well, since their loan balances will be especially high.
Gap insurance covers the difference between your auto loan and the car's depreciated value. In other words, gap insurance helps you pay off your auto loan or lease if you're no longer able to drive your car due to it being totaled or stolen.
It’s important to note that gap insurance only pays when your car is totaled or stolen, so you cannot file a gap claim if you simply can’t make your loan or lease payments. Additionally, most gap insurance policies will not pay your … read full answercollision or comprehensive deductible, if applicable.
Loan/Lease Payoff Insurance: Gap Insurance Alternative
Not all insurance companies offer gap insurance, but some offer loan/lease payoff insurance as an alternative. Loan/lease coverage is similar to gap insurance, except that it usually only pays up to 25% of the vehicle’s actual cash value toward the policyholder’s loan or lease balance, which might not be enough to cover the full amount owed.
If you’re curious about gap insurance or loan/lease coverage, you should check with your insurance company to see if they offer either.
Gap insurance does not pay when a car needs normal repairs, when a car is damaged but not declared a total loss, or when a driver does not make the necessary payments. Gap insurance only pays when a car is totaled and there is a difference between the lease or loan balance and the car’s value.… read full answer
It’s also worth noting that certain insurers limit the amount a gap insurance policy will pay, often to 25% of the car’s value. Policies with a 25% cap are usually called “loan/lease coverage.”
Gap Insurance Won’t Pay For:
A car’s reduced value after an accident that does not total it
Normal repair needs
A rental car after an accident
A new car
The gap between the car’s value and the loan or lease balance after engine failure
Extended warranty coverage that was included in the original loan or lease balance
Money included in a loan or lease balance that was rolled over from a previously financed car
Injuries, lost wages, or damage to other people’s property from an accident
Car payments missed due to unemployment, injury, disability or death
In addition, many gap insurance providers will not pay your collision or comprehensive deductible, though it depends on the specifics of your policy.
You can usually get a gap insurance refund if your car was traded in, sold, or paid off early. Gap insurance refunds are not given simply because you never filed a gap insurance claim and they usually require policies to have been paid in full up front.
If you are cancelling within 30 days after the policy’s start date, you might be able to get a full refund, minus any cancellation fees. In other cases, only a partial refund may be possible. The details will depend on your policy and your state’s laws.… read full answer
When You Can Get a Gap Insurance Refund
You are paying off, selling, or trading in the covered car.
You are switching to a different gap insurance company.
Your loan balance is no longer more than the car’s actual value, though it’s best to leave a cushion of $1,000-$2,000.
If you need a gap insurance refund because you’re selling or trading in the car, be sure to wait until the car no longer legally belongs to you before canceling your gap insurance. Then, you will need to give the appropriate paperwork to your insurance provider, such as proof of sale or auto payoff letter.
Some gap insurance companies might also require an odometer verification showing the mileage on your car, which you can get from a dealership before you sell or trade in the vehicle.
Similarly, if you’re refinancing, wait to cancel your gap insurance until your previous loan is no longer in effect.
When You Cannot Get a Gap Insurance Refund
On the other hand, drivers cannot get a gap insurance refund if the insured car is declared a total loss before the policy’s expiration date. In this case, the gap insurance will pay for the difference between the car’s value and the loan balance, but drivers will not be eligible for a refund for the remaining months of coverage.
How Long Does It Take to Get a Gap Insurance Refund?
Gap insurance refunds usually take 4-6 weeks. Staying in contact with your gap insurance provider and promptly returning signed paperwork can expedite the process, though.
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