Explanation of Gap Insurance
Gap insurance protects car owners from having to pay the balance of their auto loan when an insurance company declares the vehicle totaled, which normally occurs when the vehicle's repair costs exceed 70 percent of its actual cash value. Gap insurance covers financed and leased cars, with some restrictions. For instance, insurers generally require car owners to carry other forms of coverage before they will honor gap insurance claims.
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Purpose
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Gap insurance covers the outstanding balance, or "gap," between the value of a car and the amount its owner owes to the auto lender. For example, if the owner of a totaled or stolen car owes $20,000 to the auto lender, but the insurance company assesses the total value of the car at $15,000, gap insurance would cover the $5,000 shortfall.
Considerations
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Gap insurance is most effective for newer cars, because the difference between the car's value and the amount owed tends to be larger. New cars depreciate in value rapidly after purchase, so a buyer can easily end up owing more than the car is officially worth. This situation is even more dangerous for people who lease a vehicle, because they typically put little or no money down. For this reason, gap coverage is usually a standard requirement at the outset of an auto leasing agreement. However, some auto insurers will sell gap coverage at any time during a lease period.
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Gap Waivers
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When you lease a car, you usually don't have to buy an individual gap insurance policy. Instead, auto dealers buy gap coverage for their entire fleet of cars. They then add a "gap waiver" to the leasing contract, which releases the customer from any responsibility for gap charges. The monthly lease payment includes the cost of this waiver.
Warning
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Without gap insurance, owners of destroyed or stolen cars may be responsible for paying gap charges, which can total thousands of dollars. However, the Insurance Information Institute notes that gap insurance plans aren't available in all states as of 2010. Also, insurers may not honor gap insurance claims unless the auto owner carries collision and comprehensive insurance, and abides by all other terms of the contract. Before you buy or lease a car, ask your insurance agent and your auto dealer whether gap coverage is available, and if it is, what restrictions apply.
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References
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