Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health insuran...

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Chris Harrigan has an economic degree from Limestone College and an MBA from Clemson University. He previously managed auto insurance claims for Enterprise Rent-A-Car. Currently, he is using his business and insurance expertise to provide insurance data analysis and visualizations to enhance the user experience.

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Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager Chris Harrigan

UPDATED: Apr 13, 2022

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Key takeaways...

  • Gap insurance is usually required for leased vehicles
  • Owners who finance their vehicles should also consider purchasing their own gap protection, especially if they rolled negative equity into their new loan or have a vehicle that depreciates quickly
  • If your car is totaled, your car insurance company will pay you, or the bank or leasing company the fair market value of the car
  • Then your gap insurance coverage will chip in the difference between what is still owed on the loan and what the insurance company paid
  • Drivers who lease or finance their vehicle will also need comprehensive and collision coverage

If you are like most American drivers, you have likely been confused or overwhelmed regarding the ins and outs of your insurance policy at one time or another. Not only can auto insurance be difficult to understand but it can also be expensive.

Learning more about how your policy works and doing some research will help you to get the most out of it. In addition, researching auto insurance companies, policies, and rates will help you get the right coverage amounts for you at a price you can afford.

An online price comparison tool is something all drivers can and should use to ensure all of their auto insurance needs are being met. Try our free comparison tool today!

What is Gap insurance?

One commonly misunderstood auto insurance type is called gap insurance. Also known as gap protection, this type of coverage can save you thousands of dollars in the event that your car is totaled.

Unfortunately, it is common for many vehicles to depreciate in value quicker than the loan or lease principle is paid off.

If you are in an accident and your car insurance company decides that it would cost them more money to repair your vehicle than its fair market value, they will opt to pay you the fair market value for it and move on.

They are only obligated to pay out the fair market value of your car before it was damaged in the accident that initiated the current claim. Unfortunately, for the car owner, it makes no difference to them what is still owed on your loan or lease.

While you will get a check, minus your deductible, for your totaled vehicle, you still owe on your loan or lease. In some cases, this check is paid directly to the bank or leasing company.

However, if your auto insurance company decides that your vehicle is only worth $9,000 and your outstanding loan or lease balance is $13,000, you are contractually responsible for the difference of $4,000.

Most people do not have this type of money just sitting around that they can fork over to the leasing company or bank.

In these instances, gap insurance can be a lifesaver. Gap insurance will fill in the difference between what the auto insurance company pays and what is still owed on the loan or the lease.

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Who needs gap coverage?

Drivers who have a leased or financed car are the ones who need gap insurance coverage. If you are leasing your car, this coverage is not only contractually required but is usually rolled into your costs and already in place.

This is because the leasing company purchases a master policy from their own insurance provider and each lessee helps pay for it in the cost of their lease.

If you are financing your vehicle, you are probably not contractually required to obtain gap insurance. However, in many cases, it is recommended that drivers who are financing their cars do get gap insurance coverage.

Without such coverage, drivers are left with the potential to be liable for however much is left on their auto loan that their auto insurance company will not pay for. In many instances, you will walk away from an accident with no car and owe thousands of dollars.

If any of the following apply to you or your financed vehicle, experts recommend obtaining gap insurance:

  • Put less than 20 percent down at the time of purchase
  • Have a loan term of 60 months or more
  • Financed a car the depreciates quickly
  • Rolled negative equity from a previous vehicle into your new loan

What happens if my car is totaled and I have GAP insurance?

If you are in an accident that totals your car and you have gap protection, you can breathe a sigh of relief. Once you auto insurance adjustor determines the value of your car prior to the accident, you or your leasing company or bank will be issued a check in that amount.

Keep in mind that your collision or comprehensive (depending on the type of claim you filed) will be deducted from the amount of the check.

Then the difference between your outstanding loan balance and the amount of the check will be covered by the gap insurance company, whether it is a company you are independently doing business with or your leasing company’s gap insurance company.

No matter how these details are handled, the bottom line is that you will not owe the difference.

Other Important Coverages for Leased or Financed Vehicles

In addition, the gap protection, drivers who own a vehicle that is leased or financed need to consider other important coverages.

In these situations, you do not own your vehicle outright so you are accountable to your bank or leasing company and not just yourself if there should be damage to the vehicle.

Although not legally required in most states, comprehensive and collision coverages are usually contractually required within the auto loan or the lease. This is because it protects both you and the bank or leasing company from significant financial loss.

  • Collision Coverage  Collision coverage is designed for circumstances that damage your vehicle when it collides with another vehicle or structure.
  • Comprehensive Coverage  Comprehensive covers other losses such as hitting an animal, fire, theft, vandalism, floods, or other natural disasters.

You can select your deductible with both of these coverages as well as your coverage amounts.

While you only have so much control over what happens to your car on the road or how much your car insurance company will pay for your totaled vehicle, you do have more control over how much you pay for your auto insurance premium.

Using an online price comparison tool can put you in the driver’s seat when it comes to your auto insurance premiums. Try our free comparison tool today!