Gap insurance is an important type of auto insurance coverage that can protect you in the event your vehicle is totaled or stolen. But with gap insurance available from various sources, you may be wondering how to tell if you already have this valuable protection.
This comprehensive guide will explain what gap insurance is, why you need it, where it comes from, and most importantly, how to verify if you have gap coverage or not.
What is Gap Insurance?
Gap insurance, also known as auto loan/lease coverage, is a special type of car insurance that pays the difference between what your vehicle insurance pays out if your car is totaled or stolen and what you still owe on your auto loan or lease.
For example, let’s say you owe $15,000 on your car loan but your vehicle is only worth $10,000 at the time it’s totaled in an accident. Your regular car insurance will only pay you the $10,000 actual cash value of your car. But with gap insurance, you’d get an additional $5,000 payout to help pay off the remaining loan balance.
This protects you from owing money on a vehicle you no longer have. Without gap insurance, you’d have to come up with the $5,000 difference out-of-pocket.
Gap insurance is so important because vehicles depreciate very quickly. In the first year alone, the typical new car loses 10% of its value. This creates a gap between the car’s worth and the amount left on the loan. Gap coverage helps fill this gap.
Why You Need Gap Insurance
There are several important reasons to have gap insurance protection:
It saves you from owing money on a car that’s been totaled or stolen. Without gap coverage, you could end up continuing to make loan or lease payments long after the vehicle is gone.
It allows you to pay off your loan and start fresh with a new vehicle. The gap payout can pay off your previous loan so you can get a new car loan without negative equity rolled in.
It protects your credit by preventing a situation where you can’t afford the remaining loan balance. This avoids late payments and default.
It provides peace of mind that you won’t be left owing thousands if the vehicle is totaled or stolen. This insurance safety net gives you added security.
Where Gap Insurance Comes From
Unlike regular car insurance, you can’t just call up an insurer and add gap coverage to an existing policy. That’s because there are specific eligibility requirements related to having an active auto loan or lease.
Instead, gap insurance is offered through three main avenues:
1. Your auto insurance company
Many top insurers like Geico, Progressive, and Allstate allow existing policyholders to add gap coverage to their policies for an additional premium. This option tends to be the most affordable way to get gap insurance.
2. Your lender or leasing company
Banks, credit unions, and other auto lenders often offer gap insurance when you finance or lease through them. The cost may be rolled into your monthly payments.
3. The car dealership
Gap insurance is a common add-on product offered in the finance office when you purchase a vehicle. However, dealership gap plans tend to be more expensive.
So gap coverage can come from your regular insurance provider, auto lender, or car dealer. This wide availability is good, but it also means you need to double check where your gap policy came from.
How to Verify If You Have Gap Coverage
Gap insurance from assorted sources can make it tricky to confirm if you have coverage or not. Here are some tips for figuring it out:
Check your car insurance policy
Log into your insurance account and look for gap under your coverages.
Review recent insurance bills for a gap insurance line item.
Call your agent or insurer’s customer service line and ask if gap is included.
Check your auto loan or lease paperwork
Review your lease or loan contract for mention of gap insurance.
Look for gap charges on your monthly statements or in your payment history.
Call the lender/leasing company and verify if you purchased gap through them.
Check paperwork from the dealership
Look through your contract and other purchase documents for gap insurance.
Review any add-ons you purchased to see if gap is listed.
Call the dealership’s finance office and ask if gap was included.
Review other financial accounts
Check bank/credit card statements for gap insurance payments.
Look through your checkbook register for checks written for gap coverage.
Search emails and files for gap insurance documents.
Through this process of elimination checking all possible sources, you should get clarity on whether you have gap insurance coverage or not.
If it turns out you don’t have gap protection, it’s a smart idea to get it added onto your policy right away while your vehicle still has an active loan or lease.
How Much Does Gap Insurance Cost?
Gap insurance costs can vary significantly based on where you get it:
From auto insurer: $10 – $30 per month
From lender: $300 – $600 one-time payment
From dealership: $500 – $1000 added to loan
As you can see, dealership plans are by far the most expensive. Lender gap plans are cheaper, but you still pay interest. Getting gap through your insurer is usually cheapest.
When checking if you already have coverage, also take note of what you’re paying. An overpriced gap policy may be worth cancelling and replacing with something more affordable.
When Gap Insurance Pays Out
Understanding how gap insurance works when your vehicle is totaled or stolen can help avoid any surprises:
If your car is totaled
Your regular insurance will pay the ACV value of your car at the time of loss.
Gap insurance will then pay the difference between the ACV payout and remaining loan/lease balance.
The payout goes directly to your lender to pay off the deficiency.
If your car is stolen and not recovered
Your regular insurance will again pay the ACV value of the stolen car.
Gap insurance will pay the remaining loan/lease balance minus the insurance payout.
The payout again goes to the lender to pay off the remaining amount owed.
As you can see, gap insurance is designed to pay off your total outstanding auto loan or lease balance by filling the gap left by the standard insurance settlement.
This prevents you from having to pay out-of-pocket on a vehicle that’s been totaled or stolen. The gap payout takes care of the remaining amount you owed.
Gap Insurance Exclusions
While gap coverage provides excellent protection, there are certain exclusions to be aware of:
Deductible – Most gap plans have a deductible, usually $1,000 or less, that you must pay out-of-pocket before coverage kicks in.
Negative equity – Gap insurers typically won’t cover any negative equity from a previous car that was rolled over into the new loan.
Missed payments – You need to stay current on your loan/lease payments to maintain gap coverage.
Owner negligence – Gap insurance won’t cover losses resulting from your own negligence or improper use of the vehicle.
Understanding these common exclusions is important for having realistic expectations about what gap insurance covers and what falls outside of coverage. Be sure to read your gap policy carefully.
FAQs about Gap Insurance
Here are answers to some frequently asked questions about gap insurance:
Do I need gap insurance if I put down a large down payment?
Yes, even with a large down payment, your vehicle can depreciate faster than you are paying down the loan. Gap insurance protects against this.
What if my regular car insurance denies my claim?
Gap insurance only pays out if you get the standard insurance settlement for the car’s actual cash value first. If the main claim is denied, gap won’t provide coverage.
Can I get a refund on my gap insurance?
Depending on where you got gap coverage, you may be able to cancel early and get a prorated refund. But refunds are not always available, especially on dealer or lender plans.
Does my credit union offer gap insurance?
Many credit unions do provide gap insurance plans. Contact yours to check pricing and availability. Credit union gap plans are often cheaper than those from a dealership.
What vehicles can be covered by gap insurance?
Gap insurance can cover new and used vehicles that are leased or financed. Older cars typically cannot get coverage since their value depreciates slower.
The Bottom Line
While gap insurance is readily available, keeping track of where you got coverage can be tricky. By thoroughly checking your insurance policy, auto loan docs, dealership paperwork, financial accounts, and other records, you can get to the bottom of whether you have this valuable protection or not.
If it turns out you don’t already have gap insurance, it pays to get covered as soon as possible. Having this extra layer of protection provides
What is Gap Insurance?
What is an example of a gap insurance?
Does gap insurance write you a check?
Is gap insurance the same as car insurance?
How to figure cost of gap insurance?