Gap insurance is meant to fill a very specific purpose, and nothing more. If your car is stolen or totaled and you still owe more on the lease or loan than the book value of the car, gap insurance will pay the difference to the dealership. Because it does not pay anything to the policyholder, many people think that gap insurance is not worth having, but it is easy to understand how that sort of logic breaks down when you have to file a claim.
Gap car insurance pays directly to the dealership or lending agency. If your car is paid for, or most of the loan has been paid, gap insurance may not be any benefit. The sole purpose of having it is to pay off the difference between a loan balance and the actual depreciated value of the car. If you don’t owe anyone for the car, or the remaining balance is negligible, having gap insurance will not serve any logical purpose.
Without gap insurance, if your car is totaled and you owe more than the depreciated value of the car, the remaining loan amount is your responsibility and must be paid out of pocket. Remember, your car depreciates about 30% the first year you have it, and will continue to depreciate over the entire length of the loan. If your car is totaled out during the first two or three years, gap coverage will save you thousands of dollars in out of pocket expenses.
Some gap insurance coverages will also pay off amounts that have been rolled into your loan, such as the balance of a previous car loan. For instance, if you traded in your old car and still owed $2000 that was added on top of the new loan, some types of gap insurance will pay off the old balance as well as the difference between your car’s value and its loan balance.
Gap insurance is not expensive, and you can purchase it as part of your customized insurance package when you use free online car insurance quotes. Most insurance companies offer gap insurance as a rider for regular coverage, but check the wording for the coverage before you buy it, because not all gap coverages are going to be identical.