A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products, including home, life, auto, and commercial, and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, mainly in the insuranc...

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Reviewed by Leslie Kasperowicz
Farmers Insurance CSR 4 Years

UPDATED: Oct 19, 2021

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Here's what you need to know...

  • When you finance a vehicle, you can purchase GAP insurance through the lender or through your auto insurance company who is covering the vehicle
  • Gap insurance is an optional coverage that will pay the difference between the Actual Cash Value of your vehicle and what you owe on your car loan when you owe more than what the vehicle is worth
  • If your car is stolen, the carrier is only required to pay up to the vehicles Actual Cash Value to settle the claim. This is the limit that’s written into standard contracts when a policyholder files a comprehensive claim
  • After the values have been determined, the insurer will cut a total loss check to the lender that’s listed under the loss payee clause
  • The GAP insurance provider will then ask for a balance statement showing how much is still left on the loan. The loan will be paid off and you may receive additional funds that can be applied towards a down payment on a new car

You can pay for a vehicle alarm and install an onboard service like OnStar, but you’re never fully protected against car thieves. While property crimes have gone down in the recent years, the number of cars that are being stolen around the nation is on the rise.

Since even advanced technologies aren’t deterring savvy thieves, it’s important to invest in another type of protection.

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Being the victim of a vehicle theft can be frustrating, but it’s even more frustrating when the vehicle is financed.

Not only do you have to worry about how you’ll replace your car, you have to worry about paying off your loan. This is where GAP insurance can help you. Here’s how GAP insurance works and how it protects you:

What is GAP insurance?

GAP insurance stands for Guaranteed Auto Protection and it’s a supplemental form of protection that can be added to your personal auto policy.

The only time that you need GAP insurance is when you finance or lease a car. This is because the purpose of the coverage is to pay off your finance agreement after you file any type of total loss claim.

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Why do you need more protection to pay off your vehicle?

If you have insurance, you might wonder why you’d need more insurance to pay off your loan when the car is stolen and never recovered.

This is a reasonable inference since full coverage insurance includes comprehensive coverage that pays to repair or replace your car when it’s stolen or vandalized.

Unfortunately, many borrowers receive a lot less than they expect to receive from their insurance companies when their car is totaled.

Under your Personal Auto Policy contract, it specifically says that the company is only required to pay up to the car’s Actual Cash Value so that you can replace the car after a theft. This amount isn’t always enough.

Depreciation is the Culprit

It’s not out of the ordinary to owe more on your car than it’s worth. If you buy a car new, the car will be worth about 10 percent less than you paid for it before the ink on the bill of sale dries. You never want to be stuck paying for a loan on a car that’s been taken from you.

Since your company will determine the value of the car and issue a check for that amount, you are left paying whatever is left on your loan. That is only true if you elect not to carry GAP on the vehicle for an added premium.

Here are some common reasons why you might be upside-down on your loan:

  • You don’t put a down payment down on a vehicle when you buy it
  • You rollover negative equity from a trade
  • You buy a new vehicle that depreciates faster than the average car
  • You take out a high-interest loan where the interest charges are front-loaded
  • You take out a loan with a term of 5 years or longer

How do you use your GAP insurance after your car is stolen?

How you file a claim for GAP benefits depends on where you purchased your insurance. If you bought coverage through the dealership, you will need to file a separate claim after you file your insurance claim.

If you carry your coverage through your insurer, the carrier will cut a check under comprehensive and then under the GAP coverage.

You won’t be issued a payment to replace your car and pay off your loan until after the company has given the police a reasonable amount of time to find the car. If the car isn’t recovered, the carrier is review valuation guides to determine how much to pay under comprehensive.

Then, the adjuster will ask for documents showing your current loan balance. After reviewing the balance, they will cut a check to the lender by using the GAP benefit.

Walking out to an empty driveway after your car is stolen is a terrible feeling. Picking up the pieces without help can be difficult. This is why having a broad insurance portfolio is so helpful. If you qualify for GAP, use a rate comparison tool and see how much a full coverage plan with GAP costs.

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