When you submit a total loss claim, your insurer will pay a maximum of your car’s actual cash value (ACV)

Aside from vintage and collectible autos, all cars lose value over time. If your financed car is totaled, gap insurance can cover the remaining amount on your loan should you owe more than the car is worth. In this article, we’ll explain everything you need to know about gap insurance and recommend the best car insurance companies for gap coverage.

If you’re shopping for auto coverage, the best way to find the lowest rates is to compare multiple car insurance quotes .

What is gap insurance?

As soon as you drive a new car off the lot, its value starts depreciating. If your new car is totaled within the first few years, you could owe the bank more than what your car is worth. Guaranteed asset protection, or “gap” insurance, covers this difference.

Gap insurance comes into play if your vehicle is financed and you make a total loss claim – either after your vehicle is totaled (the cost of the repairs would be more than the car is worth) or if it is stolen.

In some cases, the amount you still owe in car payments can exceed your car’s ACV. Gap insurance, also sometimes called loan/lease payoff insurance, helps you pay off the loan in this situation. Remember, the loan doesn’t go away just because your car is totaled.

How gap insurance works

Consider the following example: Your vehicle is financed and you still owe $10,000 to your lender. You are involved in an accident, and the car is declared a total loss. The insurance claims adjuster determines that your car’s ACV is $8,000, and your insurer issues a check for this amount personal payday loans Brighton TN. If you have gap insurance, that policy will cover the remaining $2,000 to pay off the remainder of your auto loan.

The cost of gap insurance can vary but is usually inexpensive. If you buy gap insurance from the dealership, it can cost hundreds of dollars a year. If you add gap coverage to an insurance policy that already includes collision and comprehensive insurance , it typically increases your premium by around $40 to $60 per year.

How is gap insurance calculated?

Lenders and dealers calculate what you pay for gap insurance based on your loan and your vehicle’s expected depreciation. Gap insurance can be more expensive for larger loans. Car insurance companies calculate your gap insurance cost based on your vehicle and your driving profile.

Does gap insurance always pay out?

Gap insurance only pays out if the total loss claim is approved and the settlement you receive for your vehicle doesn’t cover your outstanding loan. If another driver was at fault, gap insurance can cover the difference between their insurance company’s settlement offer and the outstanding loan, as well.

Some gap insurance policies also limit the total amount you can receive. For example, Progressive’s gap insurance policy covers up to 25% of the vehicle’s ACV. It’s possible this gap payout wouldn’t cover the whole loan if your car had depreciated significantly.

Do you need gap insurance?

If your vehicle is not financed, there is no reason to purchase gap coverage. If you do finance your vehicle, gap coverage can be a good idea, but it depends on how much you drive and how quickly your car depreciates.

Keep in mind that cars can depreciate rapidly. According to the Insurance Information Institute , many vehicles depreciate 20% or more within the first year of ownership. If you don’t make a large down payment on your car, the amount you owe in car payments can quickly exceed your car’s value.

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