There are two highly important auto insurance coverages: gap insurance and lease coverage. You probably have never heard of these.
Many drivers think that the comprehensive and collision coverage that they have is enough, even if their cars get totaled or stolen.
They will be in for an unpleasant surprise, though, if they are financing or leasing a new vehicle and get totaled.
Losing it all
Let’s say you bought a new car worth $30,000. You paid a $1000 down payment, leaving you with $29,000 to pay for the next few years. You get a comprehensive and collision insurance with a deductible of $500.
Then – you get into an accident and your car is totaled a few months later.
A claim is filed. You learn that you’ll a $26,000 payment from the insurer to cover the cash value of your car.
You feel relieved. Then, you look at your loan statement: you owe $28,000 for the car. You now have a $2000 + $500 deductible balance, which you’ll have to pay from your own money.
P.S. If you want to retain salvage (what’s left of the totaled car), you may deduct the value from the payout.
Gap insurance is an optional insurance on your existing car insurance. It pays the difference between how much you still owe for the car, and what its value is after an accident.
This can save thousands of dollars if you get into a total loss.
If you got a new car, the gap can last for a couple of years. You will be solely responsible for the “gap” if a total loss occurs. Over time, the gap will vanish, but in the first few years, gap insurance can give you the coverage you need.
Many circumstances allow gap insurance if you also bought comprehensive and collision coverage. Be sure to ask an agent for info, or review the terms of your policy to understand it well.
How much is gap insurance?
You can check with your insurance agent. They often offer this, as well as a variant called loan/lease coverage. Gap insurance may cost a few added dollars to your total bill per month.
Gap insurance is also available at your dealership, but it will probably cost a lot more, averaging at $500-1000, with a large upfront payment required. So we do recommend going to your insurance company to get gap insurance.
This is a variant that is similar to gap insurance. They both cover the gap (what you owe and the actual cash value of the car).
The difference is how much they can provide in the case of total loss.
Loan/lease coverage will provide only a percentage of the actual cash value (around 25%). It can be enough to help pay the loan off, but it might not be enough to insure you.
It’s best to think twice about how much gap there is before choosing one.
Gap insurance for leasing a car
Gap insurance is particularly vital for those who are leasing a car. In fact, lease contracts include this coverage by default. Make sure you review the contract of the lease properly to check if it has gap insurance.
If it doesn’t, you can ask for it from your insurance provider.
Ending gap insurance
So now you have a new financed car. Be sure to assess the actual cash value using guidelines from NADA. Compare the value to your loan balance.
If the balance is more than the car’s worth, contact the insurance company and add a gap or loan/lease insurance to your policy. It will cost you a few bucks more, but it can possibly save you thousands in the long run.
Always monitor any changes in the value of your car (depreciation happens over time) after you acquired gap coverage.
Monitor the status of your loan balance as well. When you aren’t in the “upside down” area (you owe less than the car’s value), you can get rid of the gap or loan/lease insurance.
Your insurer should alert you if this happens, but being in the know can help you save money too.
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