How to determine if gap insurance is right for you
What is gap insurance?
Gap insurance pays for the “gap” between what you owe on your car and what it’s worth if it’s totaled in a covered accident, theft or other loss. Some providers—including Progressive—call it loan/lease payoff coverage.
Gap insurance is an optional insurance coverage for newer cars that can be added to your collision insurance policy. It may pay the difference between the balance of a lease or loan due on a vehicle and what your insurance company pays if the car is considered a covered total loss. Without proper coverage, the gap between what you’ve paid and what you owe can be substantial.
What does gap insurance cover?
Gap covers the difference between your vehicle’s value and what you owe.
So, let’s say you get into an accident and your insurance company declares the car a total loss. If you have gap insurance, the scenario would play out like this:
$28,000—Amount you owe your lender (principal and interest).
$25,000—Amount your insurance company says your vehicle is currently worth … which the insurance company calls the “actual cash value.”
$3,000—Difference between your loan balance and the insurance value for the car.
$3,000—Additional amount your insurance company will pay if you have gap insurance.
Actual cash value determines how much your policy pays
Standard comprehensive and collision car insurance policies help pay for the replacement of your vehicle if it’s a covered total loss – up to the limits of your policy and the car’s actual cash value. ACV is equal to the cost of the car when it was new, minus depreciation for age, mileage, physical condition and other factors.
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Where do you get it?
You can buy gap insurance a couple of ways: through your car dealer, lender, or your auto insurance company.
The types of losses covered vary depending on the company providing the coverage, so be sure to clarify what’s covered before making your decision. And, be aware that if you’re leasing a vehicle, leasing companies often include gap insurance in their contracts automatically.
The cost can vary, too. While most dealers and lenders offer the coverage, it may be cheaper to buy it through your insurance company. Plus, you get the benefit of having it billed as part of your total insurance premium, and generally speaking, the claims process is smoother as you’re working with just one company and one claims representative in the event of a loss.
A couple more things to note about gap insurance:
- To buy the coverage, your lender must be a financial institution rather than an individual and your policy must have comprehensive and collision for the vehicle.
- To use the coverage, your claim must be covered under comprehensive or collision and your vehicle must be determined a total loss.
To learn more about Progressive’s Loan/Lease Payoff coverage, call us at 1-800-776-4737, or talk to a local agent.