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...

  • In the insurance world, full coverage is defined as a policy that contains both comprehensive and collision coverage
  • Comprehensive and collision are two separate forms of physical damage coverage that pays to repair the covered auto when it’s damaged in a loss
  • While full coverage is a term that’s used frequently in the industry, a full coverage policy isn’t free of gaps
  • If you’re insuring a vehicle that’s financed, it’s important that you look at the value of the vehicle and compare that value to the balance of your loan
  • When you finance a vehicle that loses value quickly or you roll over negative equity into your new loan, you may be obligated to pay off a portion of your loan if you have a total loss
  • GAP insurance is a special form of coverage that you can add onto your policy that pays the balance of your loan off if your standard coverage doesn’t pay enough
  • Many companies will waive your deductible and offer money towards the purchase of a new car with GAP insurance

If you buy a full coverage auto policy, it’s reasonable to assume that your policy will fully protect you. Unfortunately, the term ‘full coverage’ is thrown around quite a bit by consumers who aren’t really familiar with what full coverage auto insurance entails. While a plan that includes full coverage offers a lot more protection than a basic plan, gaps in coverage still exist. Knowing how to protect yourself from falling into these gaps can save you financially in the event of a claim. Compare car insurance rates now by using our FREE tool below!

When you carry physical damage on your car, you’ll have peace of mind in knowing that the insurer will help you fix your car or replace it after you experience a loss.

What you might not know is that the contract itself says that there are limits as to how much the insurer will pay to restore the damaged vehicle. These limits are in no way related to the balance of your loan. This is why it’s so important to consider carrying GAP insurance on your policy whenever you’re paying on an auto loan.

What’s included under a full coverage plan?

Full coverage isn’t an actual box that you check when you’re buying a policy. Instead, it’s a term used when a combination of options are added to the same policy. What’s actually found in a policy that meets full coverage requirements depends on the carrier you’re with. At a minimum, a policy with full coverage will have the following:

  • State minimum requirements for Bodily Injury and Property Damage
  • Comprehensive
  • Collision

In addition to these options, full coverage insurance can include:

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How does the insurance company decide how much it will pay to repair your vehicle?

There are limits surrounding how much your comprehensive and collision coverage options will pay. If you were to skim through your policy contract, you would find that all standard policies pay up to the Actual Cash Value for physical damage claims on a private passenger vehicle.

Actual Cash Value is simply defined as the vehicle’s fair market value at the time of the loss. Instead of replacing the vehicle with a new model, the insurer will evaluate the car based on how much it’s depreciated over time. After depreciation has been factored in the company will offer you a settlement. In some cases repairs can be made and in others the vehicle will be totaled.

When is a vehicle declared a total loss?

A total loss is essentially when the estimated cost to repair a vehicle and restore it to its pre-loss condition exceeds its Actual Cash Value. In some cases, the state may have a Total Loss Threshold. When this is allowed, only a percentage of the value must be exceeded before the company can declare the vehicle a write-off. The TLT percentage is somewhere between 70% and 90% in most states.

What risks arise when you’re financing a vehicle?

If you own your vehicle outright, you might just walk away from your old vehicle and use your claims payout to find a vehicle that’s in your price range. Things aren’t so simple when you’re driving around a vehicle that you have a loan on. Financing a car is a convenient option for many people, but if you have a loss and you don’t have the right protections, being under contract can be a nightmare.

One of the biggest risks of financing is that you’re almost always upside down in your loan when you buy new unless you put down a hefty down payment. This is because your vehicle

This is because your vehicle loses almost 10% of its value the minute that you drive it off the lot. If you didn’t put anything down, you already have 10% negative equity in your loan. Since the standard auto policy doesn’t pay for depreciation, you’ll be on the line for that portion of the loan if the car is ever totaled.

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How does GAP insurance protect you against these risks?

GAP insurance isn’t offered with all insurance policies but it is usually an add-on. This form of protection is designed to help people who are leasing or financing their vehicles cover the vehicle’s depreciation by paying off the balance of the loan after a total loss claim is filed. GAP only kicks in to fill in the gaps when your vehicle’s value is less than the balance of your auto loan or lease contract.

Does GAP fund the purchase of a new vehicle?

Every GAP plan is different. Some of the better plans offer you more than just protection to pay off your loan. These plans might pay for your physical damage deductible and offer you a flat $1000 towards the purchase of a new car. Considering the fact that GAP only costs about $20 per year, these are major benefits for a minor cost.

Where can you buy GAP?

There are a few different ways to purchase GAP insurance. The most popular way is to buy it directly through the dealer. If you do this, be sure to negotiate the price. You can also purchase GAP insurance under your auto insurance if you finance a new vehicle that meets the company’s criteria. Check the criteria before you reject coverage through the dealer.

If you made a small down payment or you have a long financing term, gap insurance is something that you should strongly consider.

Be sure to compare the costs through a dealer and through an insurer. You can price the cost of GAP with major insurers by using an online rate comparison tool. After you compare these insurance rates, go armed into the car dealership with these estimates and then choose the option that makes the most financial sense. Enter your zip code in our FREE tool below to compare car insurance rates now!