When you purchase a new car, you'll probably be asked if you want to purchase gap insurance. Both lenders and auto insurance companies offer gap insurance to customers as a way to protect you against unforeseen financial losses. Here's a quick refresher course about gap insurance and who needs it.
What Is Gap Insurance?
Gap insurance literally covers the gap between what you owe on a car and what it's worth if your car is totaled in a covered loss, such as an accident or theft. The types of losses covered and the extent of coverage vary depending on the company providing the gap insurance, so make sure you clarify what's covered before you make your decision.
Who Needs Gap Insurance?
If you purchased or leased a new vehicle and weren't able to afford a large down payment, you may need gap insurance. Vehicles notoriously depreciate in value — and quickly — and depreciation starts the moment you leave the dealership. If you're not able to pay the difference between what you owe and what your vehicle is worth out of pocket, gap insurance may be worth your while.
One thing to remember if you're leasing a vehicle: Often, leasing companies include gap insurance or loan/lease payoff coverage in their contracts, so make sure you review your contract before you purchase it from your auto insurance company.
When Do You Need Gap Insurance?
Here's an example of when you'd use gap insurance: You swerve to avoid a deer and end up driving into a ditch, where your brand new vehicle rolls over. Though no one's hurt, your car sustains heavy damage — so much so that the cost to repair your vehicle is higher than its actual cash value (ACV). Your insurance company decides to total your car, and after running an N.A.D.A. valuation, they determine the ACV is $25,000.
You purchased your car a few weeks earlier for $28,000, and you haven't even made the first payment yet, so you still owe $28,000 to your lender. If your insurance company pays $24,500 to settle your claim — remember: you still have to pay your $500 collision deductible, so you must subtract that amount from the ACV amount — you're still responsible for paying the remaining $3,500 to your lender.
In this case, if you have gap insurance, that $3,500 is covered by your insurance company, and they'll pay your lender the difference between what you owe and what your vehicle is worth. You won't be responsible for paying the difference because you chose gap insurance when you got the vehicle.
Keep in mind that if you purchase gap insurance from your insurance company, often you can only use this coverage if your claim is covered under your comprehensive or collision coverage. Not every insurance company offers the same types of coverage, so refer to your policy for more details.
Progressive's Loan/Lease Payoff Coverage
Progressive does not offer gap coverage, but we do offer Loan/Lease Payoff coverage to customers, which is slightly different from gap insurance because a maximum payout of 25 percent of your vehicle's ACV is stipulated in your policy. In the example above, up to $6,250, less your deductible, would be paid to cover the difference between the ACV and what you owe.
When you shop with Progressive, we'll discuss whether Loan/Lease Payoff coverage is right for you. We consider the age of your vehicle — generally vehicles older than three years do not need Loan/Lease Payoff — and we even remind you when you may no longer need the coverage.
Some stipulations exist with Loan/Lease Payoff, including the following:
•Your lender must be a financial institution rather than an individual.
•Your policy must have Comprehensive and Collision for the vehicle.
•The claim must be covered under your Comprehensive and Collision coverage.
•Your vehicle must be determined to be a total loss.
•Loan/Lease Payoff will not pay for past-due amounts or other purchased coverage, such as credit life, accidental death, warranty/repair, etc.
For more information, contact us at 330-847-9876. Our licensed insurance representatives can help you decide what coverages are right for your situation.
