How does gap insurance work when a car is totaled? (New)

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Things to Remember...

  • GAP insurance in its most basic form covers the gap between your car’s market value and what you owe on your car loan or lease
  • If you keep your vehicle for five years, you can expect it to be worth about 37 percent of your original purchase price
  • GAP insurance only covers the remainder owed on the loan or to pay off the early termination fee on the leased vehicle
  • GAP insurance policies can vary greatly in what they cover and how much they cost.Reading the policy and asking questions is the only way to make sure you are getting the coverage you need

GAP insurance in its most basic form covers the gap between your car’s market value and what you owe on your car loan or lease.

Without GAP insurance, you could still owe money on your car if it gets totaled in a car accident.

When searching for a policy you should always use a comparison tool to assure you get the best plan for the best price. Start comparing auto insurance rates now by using our FREE tool above!

Total Loss Car Accidents

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When you get into a car accident, your insurer will have it evaluated by one of their preferred auto mechanics.

If the cost to repair the vehicle exceeds its current value, it is considered a total loss.

Understanding Vehicle Depreciation

When you buy or lease a vehicle, it depreciates the moment you drive it off the lot. This means that your car loan or lease amount is instantly worth more than the market value of your car.

On average, a new car depreciates 11 percent the moment your back wheels exit the dealer lot. For each year you drive your vehicle, it depreciates another 15 to 25 percent.

If you keep your vehicle for five years, you can expect it to be worth about 37 percent of your original purchase price.

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Leased Vehicle Total Loss

If you lease your vehicle, there’s a good chance that GAP insurance was included in your lease agreement.

This is to protect the car dealer from a financial loss in the event that the leased vehicle is totaled in a car accident.

Individuals that are looking to lease a vehicle should read their contracts closely, looking for the GAP insurance clause.

If it is not there, the lease should seriously consider getting multiple quotes from various insurance carriers for GAP insurance and comparing the quotes.

In addition to the GAP insurance, it was likely that the car dealership also required you to have full coverage auto insurance.

In the event that your leased vehicle is totaled in a car accident, your full coverage insurance policy would pay the market value minus your deductible.

The GAP insurance would pay the difference between the market value and your early termination fee.

For example, you have full coverage auto insurance with a deductible of $500. Your car’s market value just prior to the accident was $10,000.

Your early termination fee or lease payoff amount is $13,000. Your full coverage auto insurance would pay $9,500.

The GAP insurance would pay the remainder $3,000, and you would owe the dealership $500 to finish your lease agreement.

Purchased Vehicle Total Loss

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If you have a car loan, GAP insurance works slightly differently. In this scenario, you purchased your vehicle with a car loan from a financial institution.

Since GAP insurance is often not required for car loans, you have to locate an insurance company that offers GAP insurance.

This can be accomplished by searching through several insurance agent websites or by looking for an independent insurance agent that offers a quote tool.

The quote tools on independent insurance agent websites search through several insurance companies in order to provide you with several different policy quotes, which is a great way to quickly find affordable GAP insurance that meets your specific needs.

The full coverage policy works the same way with purchased vehicles as it does with leased vehicles except the insurance company writes you a check for the current market value of the car just prior to the accident minus your deductible.

Your GAP policy covers the difference between your car loan payoff amount and the market value of the car. You are responsible for covering the cost of your deductible.

Since the checks are often written in the policy holder’s name, it is your responsibility to pay off your car loan with the money.

In this scenario, you do not come out financially ahead, but you do not owe money for a vehicle you cannot drive.

Understanding Your Gap Insurance Policy

GAP insurance only covers the remainder owed on the loan or to pay off the early termination fee on the leased vehicle.

If you have missed payments or have late fees, paying that money is still your responsibility. If there is any unpaid interest, that is also your responsibility.

When you compare quotes, make sure to thoroughly read the GAP insurance policy and call the agent on the phone or visit in person to ask questions about the policy before you purchase.

GAP insurance policies can vary greatly in what they cover and how much they cost.

Reading the policy and asking questions is the only way to make sure you are getting the coverage you need in the event that you are in a car accident, and your car is considered a total loss.

Start comparing auto insurance rates now by entering your zip code in our FREE tool below!

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