What is gap insurance? And, do you need it? Gap insurance is a type of car insurance policy that is designed to cover the gap between what the value of your car actually is, and what you owe on the vehicle, in cases where the vehicle is totaled in an accident. Depending on the type of car insurance you have, the insurance company may not cover the full value of the loan in certain cases. This is where gap insurance comes into play.
How Gap Insurance Works
Gap insurance is designed to help those who put low down payments on a car, or for other reasons, do not have a lot of equity in the vehicle. In cases where the primary car insurance company must pay for the value of the car such as a wreck where the vehicle is totaled, the value paid by the company for the vehicle may not cover the loan amount.
Gap insurance is an insurance policy designed to fill this gap and sometimes even pay for the deductible required by the insurance company. In fact, some financing companies even require gap coverage if there was a low down payment, to ensure that they will be covered for the loan value.
Where to Get Gap Coverage
There are two main ways that gap coverage is sold. First, it is through your primary car insurance company. Gap insurance sold by your auto insurance company is regulated by the insurance board of your state and has specific requirements about what can and cannot be done. Some car loan companies require gap coverage as part of the agreement to ensure that they will be paid back for the loan amount that they let you borrow.
The second way that gap coverage is sold is through the dealer where the vehicle is purchased. Many finance managers try to sell this product when closing a loan at the end of a car sales transaction. This coverage is then financed along with your loan or lease, and all is rolled up into one sales contract. This industry is less regulated that the car insurance industry run by the insurance companies. Gap insurance sold by the car company and their financing arm is more of an “add-on” up sell more than a standard insurance policy.
Do you need gap insurance for your car loan? Maybe you do and maybe you don’t need it. You may be better off simply having a fully funded emergency fund that could pay the difference should the unfortunate incident happen and you total your car while it is upside down financially.