Life is complicated, insurance doesn't have to be.
Read time: 3 minutes
Like many things in life, gap insurance is one of those
things that is important to know about before you need it. Gap
insurance is also commonly referred to as auto loan/lease coverage.
To answer all your questions about this important coverage,
we talked with our auto underwriting team for insights.
1. What is gap insurance?
Gap insurance (or auto loan/lease coverage) is an additional
coverage you can add to your car insurance policy. It covers the
remaining loan or lease amount you may have on your vehicle if it’s
totaled in a covered accident.
So, if your car is damaged in an accident and your insurance
company deems it a total loss, your insurance company will pay off
your remaining loan balance rather than just the current value of your
vehicle considering age, condition and mileage. This loss of value
over time is called depreciation.
Read more: Totaled
Car? Here’s What You Need to Know and What Happens Next
Without this coverage, you would be responsible for the “gap”
(hence its name) between what’s left on your loan and your vehicle’s
current, depreciated value.
For example, if your vehicle is totaled in a covered
accident, your insurance company will provide you with a claim
payout equal to your vehicle’s depreciated value (less any
deductible). Depending on the amount of your loan and the
depreciation on your specific vehicle, the amount your insurance
company pays you may be less than the amount left on your loan.
This leaves you having to pay that remaining amount. However, with
gap insurance, your insurance company would pay the remaining loan amount.
2. What’s an example of how gap insurance works?
Let’s say your car is totaled
after a bad accident. Your car’s current
value is $10,000.
You have a loan on this vehicle. Your remaining loan amount
Your insurance company is going to pay you the current
value of your car ($10,000).
This leaves a remaining $2,000 balance on your loan, which
you will need to pay. If you have auto loan/lease coverage, it may
pay the remaining $2,000 for you.
3. What is the most gap insurance will pay?
In general, your insurance will pay the lender based on what
you owe on your vehicle and the coverages your policy has, but this
can vary depending on your claim.
4. Who might need gap insurance?
If you either took out a loan to pay for your vehicle or it’s
under a lease, you may want to consider gap insurance.
Other factors that may influence your decision include:
5. How can I buy gap insurance?
buy gap insurance, you’ll likely need to have a car insurance policy
that includes the comprehensive (other than collision) and collision
coverages. Most companies will require you have both of these
coverages on your vehicle’s policy before they will add an auto
loan/lease gap coverage.
We, of course, think that contacting your local, independent
insurance agent or your car insurance company is the best first step.
Car dealerships do offer gap insurance, but it’s often more expensive
than just adding it to your existing car insurance policy.
To start the process of adding auto loan/lease coverage to
your car insurance, contact your local independent agent today.
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Disclaimer: This article is not expert
advice. The analysis of coverage is in general
terms and is superseded in all respects by the Insuring
Agreements, Endorsements, Exclusions, Terms and Conditions of
the Policy. Some of the coverage mentioned in this material may
not be applicable in all states or may have to be modified to
conform to applicable state law. Some coverages may have been
eliminated or modified since the publishing of this
material. Discounts may not be available in all states.
Limitations and conditions may apply. Premiums will be based on
benefits chosen. Please check with your local Independent
Auto-Owners Insurance Agent for details.