What is gap insurance and what does it cover and its characteristics?

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What is gap insurance? If your insured car is in an accident, or stolen and not recovered, your car insurance may give you a settlement based on the car’s actual value (ACV), not what you paid for it.

Since cars depreciate quickly, the settlement agreement may not cover what you still owe on your car loan or lease.

That could leave you without a car and with a large bill to pay. Covering the gap across the country can help avoid this sad scenario.

What is gap insurance?

Supplemental insurance is an optional auto insurance coverage that can help certain drivers fill the “gap” between the amount they owe on their car and the actual cash value (ACV) of the car in the event of an accident.

The actual cash value of a car is the monetary value of the car at the time of the accident, not the original price of the car.

Gap coverage adds more protection to your auto policy

Gap insurance is optional insurance coverage for newer cars that can be added to your collision insurance policy.

You can pay the difference between the balance of a vehicle lease or loan and what your insurance company pays if the car is considered a covered total loss.

Without proper coverage, the difference between what you’ve paid and what you owe can be substantial.

Your lender may require gap insurance

If you financed your vehicle with an auto loan, your lender may require loan gap insurance in addition to your collision and comprehensive coverage.

If you lease your vehicle, lease gap insurance may already be included in the cost. Check the coverage documents to make sure.

Actual cash value determines how much your policy pays

Standard comprehensive and collision auto insurance policies help pay to replace your vehicle if it’s a total loss covered up to your policy limits and the actual cash value of the car.

 The VCA is equal to the cost of the car when it was new, less depreciation for age, mileage, physical condition, and other factors.

After just one year, your car’s VCA can be thousands of times less than what you paid for it, which can leave you with an expensive loan or lease balance.

The nation’s gap insurance may cover some, or all, of that amount.

This coverage is available in some states and applies to vehicles 6 years old or less.

Let’s say your car costs $35,000 when new, and you currently owe $30,000. If the car is complete, the VCA of the vehicle may be as low as $25,000.

You have a $500 deductible, so the car accident settlement is $24,500. Your gap insurance coverage can pay off the remaining $5,500 on the loan instead of having to come up with the money yourself.

What does gap insurance cover?

The basic concept of gap insurance is easy to understand, but what exactly does it cover? 

Gap insurance coverage is quite versatile, but keep in mind that it only covers damage to your vehicle, not other property or bodily injury resulting from an accident.

Here are some common questions related to accident insurance coverage.

Does GAP insurance cover theft?

Yes, GAP insurance can cover theft in the event your car is stolen and not recovered.

Does GAP insurance cover deductible expenses?

No. Even in the event of an accident covered by your GAP insurance, you will still have to pay your deductible.

In other words, if your gap reimbursement amount is $4,000 and your deductible is $500, your total reimbursement amount would be $3,500.

Does gap insurance cover engine failure?

No. Gap insurance is only used in the event of a total loss from a covered accident, not for mechanical repairs.

Does gap insurance cover death?

No. Gap insurance only applies to vehicle losses and does not cover bodily injury, medical expenses, lost wages, or funeral expenses.

Does gap insurance cover negative capital?

Yes. Negative equity is another term for the gap between what you owe on your auto loan and the actual value of the car.

Gap insurance example

Let’s say you are involved in a covered accident and are found not at fault. Your car is damaged beyond repair and needs to be replaced.

You still owe $15,000 on your car loan, but the VCA on your car is only $11,000 (sometimes referred to as being “underwater” or “upside-down” on your loan).

If you have gap insurance, it can help you cover the $4,000 gap between what you owe on your loan and what your car is worth, after your deductible.

Not all drivers need gap insurance. But if you’re leasing or making payments on a vehicle, you need to find out if gap insurance is right for you.

By aamritri

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