What is gap insurance and do I need it when filing an auto insurance claim?

Gap insurance is an optional coverage that offers financial security to car owners in specific circumstances. For example, this type of insurance safeguards you from bearing the burden of paying off a loan or lease on a car that has been stolen or deemed a total loss after an accident.

But what is gap insurance, and do you need it when you learn how to file an auto insurance claim? Read on to learn more.

Understanding Gap Insurance and When You Need It

Simply put, gap insurance covers the difference between the outstanding balance on a car loan or lease and the vehicle’s actual cash value (ACV) at the time of theft or significant damage.

Standard auto insurance policies generally cover only up to the ACV, which can leave you owing money to your lender or leasing company if your car is worth less than your remaining balance.

Here are a few situations where gap insurance might be beneficial:

• You leased your car.
• You made a low down payment on your loan.
• Your financing term is lengthy.
• You rolled over negative equity from a previous loan into your new one.
• Your vehicle depreciates quickly.

Gap insurance is most beneficial for those who purchased a car with a low down payment, as new cars often depreciate faster than used cars. Before purchasing this coverage, consider your car’s depreciation rate, loan balance, and down payment amount.

Read more:

• How To Cancel Gap Insurance
• Affordable No-Down-Payment Auto Insurance

The Role of Gap Insurance in Auto Claims

Imagine you purchased a brand-new car for $25,000 and took out a loan to finance the purchase without a down payment. After a year, the car’s ACV has depreciated to $20,000, but you still owe $23,000 on your loan. Unfortunately, you get into an accident that results in your car being deemed a total loss.

Unfortunately, your standard auto insurance policy will cover only the ACV of $20,000. However, since you have gap insurance, your gap provider pays the extra $3,000, ensuring you don’t have to pay off the difference out of pocket.

To file a gap insurance claim, follow these steps:

• Contact your insurer to report the incident and initiate the claims process.
• Provide all necessary documentation, including the original gap contract, sales agreement, manufacturer’s invoice, financing contract, payment history, valuation report, insurance settlement statement, and any police reports you filed.
• Stay on top of any requests for additional paperwork and follow up with your insurer regarding the status of your claim.

Once your claim is accepted, most gap insurers send a check directly to your auto lease or loan provider within four to six weeks. Remember that different insurers may have slightly different claim requirements, so always verify the necessary documents with your gap insurance provider.

Purchasing Gap Insurance: Dealers vs. Auto Insurers

How much gap insurance costs will vary depending on whether you purchase it through a dealer, bank, credit union, or auto insurance company. Compare offers from various sources to find the best deal.

While lenders and dealerships sell gap insurance at a flat rate, usually between $500 and $700, auto insurers charge an average of $20 to $40 per year when bundled with an existing policy or between $200 and $300 for a standalone policy.

In addition, when buying gap insurance through an auto insurer, you avoid paying interest on bundled lease/loan payments. Consider bundling gap coverage with collision and comprehensive coverage on your auto policy — this can add as little as $20 per year to your annual premium.

When to Cancel Your Gap Insurance

You’ll typically need Gap insurance for about two years or until you owe less than your vehicle’s value. It’s essential to keep track of when this occurs so that you can cancel the policy and avoid unnecessary expenses. Be sure to learn how to cancel gap insurance if:

• You’ve paid off your loan early.
• You sell the vehicle.
• The amount owed on your loan is less than the current worth of your car.

Be aware that your car’s ACV may be up for debate during the claims process. However, you can negotiate a total loss auto insurance settlement by providing clear evidence of the vehicle’s current value.

Deciding When You Need Gap Insurance

Gap insurance can be a lifesaver in cases where your car is stolen or seriously damaged, and you still owe more on your loan or lease than the vehicle’s actual cash value. However, it’s not necessary for every driver.

Carefully evaluate your financial situation and consider factors like depreciation rate and loan balance before purchasing gap coverage.