Understanding Gap insurance and why you need it

gap insurance

Most drivers who have comprehensive and collision coverage refer to this combination of coverage options as “full coverage”.  A term that is quite misleading to the general public as they assume they are FULLY covered without nuance.  Therefore, it is important to clarify few things here. 

If your vehicle is totaled following a total loss accident, the insurance company pays the actual cash value of the vehicle at the time of the loss. Most often, this cash value is lower than the loan balance for most financed vehicles. So a driver will eventually be left with a balance owed to the finance company after the insurance settlement. 

This is where Gap insurance comes in. It will help pay the difference between the cash value/insurance settlement and the loan balance.

However, it is important to note that this coverage is as an optional one and therefore must be purchased at a cost.  To qualify for gap insurance, you will need to have collision and comprehensive insurance on your car insurance policy. Most insurance companies also require that the vehicle is new and other companies allow the coverage to be purchased on vehicles that are a couple of years old. So make sure to check the requirements with your insurance company and ask for a quote. While requesting a quote, be aware that the Gap coverage is often referred to by another name: “loan/lease payoff.”

You can obtain this coverage whether you purchased or leased the vehicle. It is even more important to purchase this coverage if your down payment was less 20%, your loan payout period is 60 months or over and even more important if you traded a vehicle with a negative equity and rolled this negative equity into your new vehicle.  

It is also important to note that some vehicles depreciate more than others. According to IseeCars, the average car depreciates by 40.1% after five years. 

All these factors increase your loan balance and put you at a higher risk of a larger loan balance even after the insurance payout in case of a total loss. 

Reversely, once your loan balance is lower than your vehicle actual cash value, you can feel free to drop off this coverage as it will no longer be beneficial to you. 

It is also important to be mindful of what the Gap insurance does NOT cover. The deductible is still an out of pocket expense and Gap insurance won’t cover it. Gap insurance does not cover any overdue payments or late fees. 

Also, if your vehicle was declared a total loss and you decided to keep it, Gap insurance will not cover the vehicle repair costs. 

After a “total loss” of a vehicle the policy holder has rights to the salvage of the car. Perhaps the vehicle has sentimental value, is unique, part of a set, etc. No problem. The claims adjustor is happy to discuss valuation of the vehicle so that they client may retain ownership of it and receive partial payment for the “replacement”. This is unusual, but not impossible or too challenging. Insurance companies often prefer it because it minimized the amount of time and energy that they have to put into shipping, auctioning, applying for a salvage title through the State Department of Motor Vehicles, transferring that title, etc. So sometimes it puts the client is the driver’s seat to convenience for the company while getting to keep a car that they hate to lose. Please note! “Salvage Titles” can be difficult to insure for physical damage thereafter due to such extensive damage. It’s definitely a factor that has to be considered.

If this is confusing (as blogs can be) please contact one of our agents to determine if this coverage could help you avoid a financially painful situation. It may be best described through live case studies from our experience anyway. May we help? Our contact number is 541.857.0679, just ask to speak to “a personal lines agent” and we’ll talk through the rest.

Thank you. We are proud to offer our professional advise in your situation to take out the guessing.