Whether or not you’ve experienced London Underground’s “mind the gap” mantra on the “the tube,” you know gaps allow for vulnerability. Enter: Gap insurance. When it comes to the gap between what you owe on a car and what it’s worth, gap insurance covers the difference in the event your vehicle is totaled or stolen.
Most auto insurance policies only pay the depreciated street value for what your car is worth if it was bought today. Getting the replacement value for your claim, also known as the actual cash value (ACV), means you don’t get the true replacement cost to buy now what you got then.
Here’s what would happen: You just purchased a new car for $25,000. It instantly depreciated $5K after only driving it a month. It gets totaled. Your auto policy determines the ACV to be only $20,000 based partly on the Kelley Blue Book. This leaves you with a $5K expense you’re still responsible for. Depending on the type of gap coverage you have, it would pay for some, or all, of this difference.
So do you have a gap? You might be upside down if:
• Your vehicle is new, leased or will depreciate quickly—typically luxury brands or fully loaded with all the options.
• You financed more than the purchase price, rolling negative equity from a previous vehicle into the loan.
• You financed the vehicle for more than 72 months.
Eligibility for gap coverage can also depend on factors like the age of your vehicle (usually 8 years or less), not financing your vehicle via a mortgage loan or credit line, and having purchased your vehicle within the past year. If you think this is you, ask your licensed insurance broker about the policy specifics of your current auto insurance. If you see language in your policy referring to: loan/lease payoff, total loss or greater of, etc.—these phrases point to limited gap coverage meaning you’ll still be stuck with paying off some of the loan balance.
Most car dealers also offer gap coverage. Some premiums are monthly, while many are a one-time fee around $300. Gap endorsements (auto policy riders) and gap waivers (built into the loan amount) are also forms of gap coverage to be aware of. It is often much less expensive to add this to your auto insurance. Most likely, your insurance company will be around longer than a dealership.
If you’re in the high risk group and/or are upside down on the vehicle, it’s probably a good idea. And if you don’t need gap coverage, breathe a sigh of relief. Because the only gap you should have to worry about is the one between you and the coffee in your cup holder.