What Does Gap Insurance Cover?
Posted on Oct 13, 2016
Gap insurance is one type of insurance coverage that might puzzle many drivers. Understanding what this type of coverage does and does not protect will help you make an informed decision about whether it’s the right choice for you.
In order to discuss what gap insurance covers, it is best to explain what gap insurance is. This is an add-on coverage designed to help car owners cover “gaps” between the actual cash value of the vehicle at the time of the accident and the money that drivers owe on the car.
What this means is that if you are in an accident and your vehicle is totaled, you may discover that the insurance company assesses the actual cash value (ACV) at $18,000. That’s great if you owe $18,000. Chances are, though, that you owe something more along the lines of $23,000 leaving a gap of $5,000 between the insurance settlement and what you owe the bank. Gap insurance covers the difference, or gap, less your deductible.
What is Protected by Gap Insurance?
In order to have gap insurance protection, you must also have comprehensive and collision coverage on your vehicle. Gap coverage typically extends to the following types of situations, though you will need to check with your specific insurer for the specifics of your coverage:
- Accidents
- Fires
- Floods
- Hurricanes
- Theft
- Tornadoes
- Vandalism
Some policies will even provide for the cost of your deductible, though this is an exception rather than the rule.
The big benefit to keep in mind with gap insurance coverage is that it protects you from owing a large amount of money on a car you can no longer drive.
What Isn’t Covered by Gap Insurance?
Before you dive right in, it’s also important to understand what is excluded from gap protection, such as late lease payments, money that is “rolled” into the new loan (like remaining payments on an older vehicle, extended warranties, etc.), and security deposits.
Also understand that gap insurance is specifically related to auto accident damage to the vehicle and does not protect for things like negative equity, engine failure, medical expenses, or liability issues. Late fees, interest charges, and late payment penalties are also excluded from gap coverage.
Who Needs Gap Coverage?
While it is certainly great to have gap insurance coverage for anyone worried about replacing a vehicle in the aftermath of an accident, not everyone needs this type of insurance protection. Some people believe that this insurance is only relevant for drivers who are leasing their vehicles. While it is almost always a necessity for them – at the least an extremely wise investment – it is not limited to lessees. In fact, people who purchase new or late model cars might find this coverage beneficial thanks to the rapid rate at which cars depreciate in value.
If you’re involved in a lease of 60 months or longer, paid less than 20 percent down on your vehicle, rolled negative equity into your new loan, or drive more than 15,000 miles per year, you are an excellent candidate for gap coverage.
The goal is to avoid finding yourself in a situation where you’ll owe more on the car than the insurance will pay for it. If you have the cash reserves and can easily afford the gap, then this type of add-on insurance isn’t necessary.
While you can get gap coverage from the dealership itself, it is in your best interest to explore your options and compare costs vs. value from more than one carrier.
Otterstedt Insurance Agency has been serving the insurance needs of New Jersey families and beyond for nearly 100 years. We understand the challenges you face when purchasing auto insurance that provides the right amount of coverage and protection at affordable rates.
