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When Does Gap Insurance Not Pay?

Gap insurance comes in place when the car has been bought through a loan. It covers the difference between your vehicle’s actual cash value (ACV) and your lease or loan balance. Here’s what you need to know about Gap insurance coverage.
When Does Gap Insurance Not Pay
When Does Gap Insurance Not Pay?
Gap insurance is an optional car insurance coverage that helps you pay off the loan if your car is stolen or totaled. Let's understand the key details pertaining to using Gap Insurance to protect your prized possession.
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A new car is a significant financial commitment; many buyers pay for years. It’s crucial to remember that the value of a new car can decrease rapidly, particularly within the first year. While it varies by vehicle, in many cases, a new car can be worth 10% less than you paid as soon as you drive it off the lot. So, if a car is totaled in an accident, a full coverage auto insurance plan will only pay the automobile’s current market value. What happens if the amount you still owe on your auto loan exceeds what your auto insurance will pay? Well, here comes the gap insurance.

Gap insurance is an optional car insurance coverage that helps you pay off the loan if your car is stolen or totaled. However, it won’t pay if a car needs repairs, is damaged but not deemed a total loss, or if the driver doesn’t make the payments. Also, remember that this insurance does not cover replacement components, injuries, or accident-related property damage to third parties. It won’t pay if you miss a payment because of a disability or unemployment. Also, note that older vehicles are typically not eligible for gap insurance coverage. Also, check out Beem to get the best car insurance for your vehicle and avail up to 40% off on your coverage.

Significance of Gap Insurance

Gap insurance comes in place when the car has been bought through a loan. It covers the difference between your vehicle’s actual cash value (ACV) and your lease or loan balance. It helps you from having to pay the remaining loan balance if your total loss insurance claim settlement is not enough. In simpler words, let’s assume you owe $40,000 on a loan, but your car is just for $38,000. In this scenario, gap insurance will pay the difference to close on the policyholder’s loan. But remember, there may also be a limit on the claim amount, usually a percentage of the vehicle’s value. 

In case of an accident, you must file a claim with your auto insurance company to report the accident and any damages. Your auto insurance company will determine the damage to your car, and its actual cash value (ACV) will be evaluated. Your gap insurance policy will cover the difference if the ACV of your car is less than the amount you owe on your car loan or lease. But you will still be responsible for paying any deductibles associated with your auto insurance policy. With gap insurance, you can rest assured that you won’t be financially burdened. As a result, you can focus on other aspects of your life without worrying about potential financial setbacks.

You can purchase gap insurance from a bank or financial institution holding your car loan. You can also buy it from the dealership you bought the car from or from your car insurance company. An insurance company specializing in stand-alone gap coverage can also provide this coverage to you.

Validity of Gap Insurance

Gap insurance can last five years, unlike normal car insurance, which you purchase yearly. However, it must be purchased within the first year of owning your car. To be precise, it must be purchased within 30 days of a new car purchase. Also, when purchasing gap insurance, know what’s covered and what’s not. It’s essential to read the fine print of all policies because they are all different. Gap coverage is not legally required in any state, but some financial institutions require it for loans.

Although ‘loan/lease payoff’ and ‘gap insurance’ are frequently used synonymously, they refer to two distinct insurance products. Loan/lease coverage covers up to 25% of the car’s actual cash value (ACV) instead of covering the entire difference between what a driver owes on a totaled car and its value.

What Are the Instances Where Gap Insurance Does Not Pay?

Gap insurance can be highly beneficial but may not be available in certain situations. It is important to remember that it does not cover other property or injuries resulting from an accident, nor does it cover engine failure or other repairs. 

Failure in the Maintenance of the Vehicle

Not only is maintenance necessary to keep your car running smoothly, but it is also for your insurance coverage. You must complete routine maintenance, such as tire rotations, oil changes, and engine inspections, to be able to file a gap insurance claim. Drivers are expected to maintain their vehicles properly, and insurers may deny claims if negligence is proven.

Excluded Vehicles

Gap insurance may not be available for certain vehicles or circumstances. Vehicles such as motorcycles, recreational vehicles, commercial vehicles, and leased vehicles may not qualify for gap insurance. Your gap insurance policy may not cover losses from extensive modifications or commercial use of your vehicle.

Overdue payments

Gap insurance will not cover overdue payments or payments that were moved to the end of a loan due to a holiday.

Security deposits

Since security deposits are not directly related to vehicle value or loan amount, gap insurance typically does not cover them. They are separate financial arrangements between the person leasing the car and the leasing company. You may need to look at other insurance options leasing companies offer to cover security deposits or other lease costs.

A Down Payment for the New Car

Many people choose financing options such as car loans to make car purchases more affordable. However, a major factor that can significantly impact the terms of your car loan is a down payment. The greater the down payment, the less interest and principal you’ll pay each month. So, buying gap insurance is a good idea if you have made less than a 20 percent down payment on your new car.

However, gap insurance doesn’t cover it because down payments are part of the initial transaction when purchasing a new car and are not part of the loan agreement. If the car is declared a total loss, gap insurance kicks in.

Costs for extended warranties

Extended warranties are primarily designed to pay for replacement or repair expenses in non-total loss scenarios. These expenses are not covered by gap insurance. Specific mechanical or electrical components that can break down or require repair after the manufacturer’s warranty expires are covered under extended warranties. In contrast, gap insurance covers the loan if your vehicle is stolen or totaled.

Why Do Some Things Aren’t Covered by GAP Insurance?

There is no coverage under gap insurance for vehicle delivery fees, service plans, extended warranties, or first registration fees. Additionally, negative equity from a previous finance deal will not be covered. The gap insurance policy does not cover roadside services like replacing tires, towing, or deductibles. 

Who Are the Top Gap Insurance Providers?

Fortunately, you have many options when it comes to buying gap insurance. The world of insurance has a lot to offer. But, choosing the right gap insurance company requires research. The first step is to determine whether or not you need gap insurance, and if so, find out what rates the best gap insurance companies offer to identify the best one for you. Some of the most popular include Allstate, Progressive, Amica, Nationwide, Esurance, etc.

Since 1937, Allstate has been one of the US’s largest and oldest car insurers. Another major US insurer is Amica, which operates in every state except Hawaii. On the other hand, Progressive provides loan/lease payoff insurance, which is similar to gap insurance. Gap insurance generally costs about 5% of your annual auto insurance premium. However, the rates will vary based on your location, your driving history, and your car’s assessed value. So, if you buy gap insurance, look for other rates offered by insurance companies, lenders, and auto dealerships. You might find an insurance company that will charge the lowest rates.

Conclusion

You may not need Gap Insurance coverage if you bought the vehicle with cash or own it outright. Your gap insurance only kicks in when you owe more than the vehicle is worth. The Gap insurance provider covers the difference between the primary insurance payout and what’s still owed on the loan/lease contract.

FAQs

Is Gap Insurance worth it?

Gap insurance coverage is an optional type of insurance. The worth is determined by the car’s valuation and the amount you have paid towards the remaining debt of your loan. For example, choose this kind of insurance if you made a small down payment on your automobile and will be paying for it over four to five years or if your car’s worth may decrease.

How does gap insurance work if your car is totaled?

First, you need to file a claim with your gap insurance provider as soon as your vehicle is declared totaled by your primary insurance provider. Once you file the claim, the gap insurance provider will verify whether your vehicle has been totaled due to a covered cause. Upon verification, the driver’s primary insurer pays for the vehicle’s actual cash value minus any applicable deductible.

Will gap insurance pay off my loan if I trade in my car?

It depends because the negative equity is rolled into your new loan when you trade in a car. However, not all gap insurance policies will cover negative equity, so buy a policy that rolls negative equity into your new car loan.

Does gap insurance always pay the difference?

No, it does not. Gap insurance applies if there is a difference between the lease or loan balance and your car’s value. However, it only pays the difference when your vehicle is stolen or totaled in an accident.

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Author

Picture of Aniket Kulkarni

Aniket Kulkarni

A seasoned Product Manager specializing in car insurance content, Aniket has a passion for simplifying complex insurance concepts. His strategic approach to content development reflects years of experience in the product development industry, coupled with a commitment to providing accurate, reliable information.

Editor

This page is purely informational. Beem does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

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