Gap insurance is a type of auto insurance coverage that helps cover the “gap” between the amount owed on a leased or financed car and its actual cash value (ACV) in the event of a total loss. This coverage is particularly valuable for individuals who owe more on their car than what it’s worth.
How Gap Insurance Works
When you lease or finance a car, you agree to make monthly payments over a specified period. However, if your car is totaled in an accident or stolen and not recovered, your auto insurance provider typically only reimburses you for the ACV of the vehicle. This amount may be less than what you still owe on your car loan or lease. Here’s where gap insurance comes in.
Let’s say you owe $20,000 on your car loan, but its ACV at the time of the accident is $15,000. If you have gap insurance, the coverage will pay the $5,000 difference, so you aren’t left with a hefty bill for a car you no longer possess.
Types of Gap Insurance
Gap insurance is available for both leased and financed cars. For leased vehicles, gap insurance is often built into the lease agreement. However, for financed cars, you can typically purchase gap insurance separately through your auto insurance provider.
Pros and Cons of Gap Insurance
One advantage of gap insurance is that it provides financial protection in the event of a total loss, ensuring you aren’t burdened with a significant financial loss on top of losing your vehicle. However, it’s essential to weigh the cost of gap insurance against the likelihood of needing it. If you owe less on your car than its ACV, gap insurance may not be necessary.
Key Takeaways
Gap insurance is a valuable form of coverage for individuals who lease or finance a car, particularly if they owe more on the vehicle than its ACV. This coverage can help bridge the gap between what you owe and what your auto insurance provider reimburses in the event of a total loss. However, it’s essential to assess your individual circumstances and the cost of gap insurance before purchasing it.
