Car Accident Total Loss
If you are in a car accident and the cost to repair your car is more than what the car is worth, or the car cannot be repaired, it is considered a total loss by your insurance company. In this scenario, your car insurance company would pay you the market value of your car prior to the accident minus your deductible.
Since cars depreciate rapidly, the market value of your car may be lower than your car loan.
Without GAP insurance, you would still be responsible for paying off the remainder of your loan. This can put some car owners in a bind because they need another car but are still making car payments on a car they cannot drive.
GAP Insurance for Leased Cars
There is a fundamental difference between leased cars and cars that are purchased traditionally through car loans. When you acquire a leased vehicle, you make monthly payments to the car dealership to essentially rent the car for the duration of your lease. The car dealership still owns the vehicle. For this reason, GAP insurance is usually built into the lease in order to protect the car dealership.
If the leased vehicle were to be totaled in a car accident or stolen, the GAP insurance would reimburse the car dealership for the remainder of the cost of the vehicle. The car dealership, in this instance, would receive an amount equal to the lease agreement’s early termination fee. It does not include any past due amounts on the lease or any late fees that the lease has accrued over the duration of the lease. The car lease would not be responsible for the vast majority of the money owed, but he or she would not receive a GAP insurance payout and would need to purchase or lease another vehicle.
GAP Insurance for Purchased Cars
The vast majority of car owners purchase their vehicles using car loans. The loan can be issued from the car dealership’s financial department or acquired through a bank or other financial institution. In this instance, the car dealership receives all its money from the financial institution, and the car owner pays off the loan via monthly payments.
While many financial institutions require a certain amount of car insurance, they often do not require GAP insurance, and GAP insurance is not written into the loan contract.
However, car owners with loans can purchase a separate GAP insurance policy to cover the difference between the market value of the car and the loan payoff amount. It does not reimburse for payments already made or down-payments.
GAP Insurance in Action
Car insurance that does not include GAP insurance will only pay the market value of the car just prior to the accident. For example, if you purchased your car for $12,000 and at the time of the accident, you owed $10,000 on your car but your car was only worth $7,000, the insurance company will write you a check for $7,000 minus your deductible. This means that you would still owe $3,000 on your car loan.
If you have GAP insurance, the total payout would be $10,0000, leaving you with a balance of $0. While you would not receive any extra money, you would not have to purchase another car while still owing money on your totaled car.
GAP Insurance and Insurance Companies
Most insurance companies do not advertise their GAP insurance policies, and they are not required by law to tell you if they have GAP policies available. This means that you must ask your insurance agent about GAP insurance prior to the purchasing your car. If you ask, your agent is required to tell you about the policies, and he or she should offer quotes for the coverage.
If you are leasing your vehicle, make sure the lease agreement include GAP insurance. Otherwise, you could be left financial responsible for the early termination fee or the remainder of your lease in the event of a car accident or the leased vehicle is stolen. You should always compare quotes to make sure you get the best coverage for the best price. Start comparing car insurance rates now by entering your zip code in our FREE tool below!