Gap Insurance: What is It and Who Needs It?

Gap insurance, also known as “loan/lease coverage” or “loan/lease payoff coverage”, is a type of automobile insurance coverage that protects you if your car is totaled while you are upside down on your car payments. It supplements your collision and comprehensive coverages by paying up to a certain percentage (often 25%) more than your car’s fair market value in the event your car is totaled and you owe more on it than it is worth. If your car is paid off, or if it is worth more than what you owe on it, you don’t need gap coverage. Otherwise, you do. The good news is that it is a fairly cheap coverage.

How Gap Coverage Works

Gap coverage is only triggered if the damage to your car results in a total loss. It applies whether the damage to your car is your own fault or someone else’s. To understand the value of gap coverage, you must understand how automobile property damage coverages work. Your collision and comprehensive coverages will only pay you the fair market value of your car if it is totaled. So, if you owe $10,000.00 on your car, but its fair market value is only $8,000.00, collision or comprehensive coverage will only pay you $8,000.00 (minus any deductible) if the car is totaled. You are still responsible for the remaining $2,000.00 you owe on the car loan.

Gap insurance pays that $2,000.00 gap between the value of the car and how much you owe. Some gap coverages will even pay your collision or comprehensive deductible. This will depend on your specific policy language.

Gap coverage is often capped at a certain percentage above your car’s fair market value, such as 25%. In the above example, this works out well, because $2,000.00 is 25% of $8,000.00. However, if you owed $11,000.00 on that same car, you’d still owe $1,000.00 even after your gap coverage paid (which is still better than owing $3,000.00). Just be aware of whether your gap coverage cap is sufficient to fully protect you. Note that gap insurance will never pay more than the amount required to pay off your car loan, regardless of the percentage cap.

What if Someone Else Damages My Car?

If another driver totals your car, his property damage coverage will only pay you the fair market value of your car, regardless of how much you owe on it. This may seem unfair, as ultimately his negligence caused you to have to pay off your entire loan. However, the law only allows you to recover the actual damages caused by his negligence. In this case, he deprived you of a car worth a certain amount. The fact that you owed more than the car was worth is not his fault. You owed more than the car was worth before the accident ever happened.

Once again, gap coverage comes to the rescue in this situation. It will still pay off your car loan (up to any applicable cap) even though the damage was caused by a third party’s negligence.

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How Do I Know if I Owe More Than My Car is Worth?

Figuring out the amount you owe on your car is straightforward. Multiply your monthly car payment by the number of payments remaining. Figuring out the fair market value for your car requires more research. Even experienced insurance adjusters can differ in their valuations of cars.

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An excellent free online resource for estimating your car’s fair market value is Edmund’s True Market Value tool. It goes beyond a simple make, model and year valuation and customizes its value using factors such as mileage, color, options, condition and will even tailor it to your region if you enter your zip code. This is also a great tool to use if you handle your own property damage claim.

When In Doubt, Get Gap Insurance

If you’re not sure whether you are upside down on your car payments, buy gap insurance. It’s better to be safe than sorry. It is extremely cheap compared to your other coverages (when I needed it many years ago, it was around $20-30 for a whole year). Losing your car in an accident sucks badly enough. Losing your car in an accident and still having to pay for that car sucks beyond imagining.

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10 Responses to Gap Insurance: What is It and Who Needs It?

  1. Frank Khad says:

    Greetings! I would like to thank you for your Very Helpful Site!

    I have a question to ask! I hired a lawyer who just recently has dropped my case without any notice! This is when there are just few days left to the hearing date with the defendant’s insurer! And three months to the court date!
    With no doubt the defendant’s insurer will take advantage of this situation as I have left country after my ex-wife left me and I had to join my relatives abroad, those who have been my only help and very supportive!
    What would be the worst scenario here? AND if I can postpone the hearing and the court date until finding someone who represent me?

  2. Tara Ford says:

    Back again with the Walmart fall my mother took a year ago in FL.
    Walmarts’ first offer(15k) is an amount that is shy of paying her medical bills. No pain and suffering included. Our demand letter is 44k and I worry that since their first offer doesnt even cover the bills, that they will hardly move with a counter. ( they took 6 weeks after the demand letter response date to reply) Im thinking about 36,500 for our counter rather than starting with half way. Also they stated THEY will pay Medicare and Optum(UHC) (not my mother paying)1.Do we argue no pain and suffering was included?The claims adjuster indicated she would be paid for P&S, just not how much. and do we handle the direct payment to Medicare and Optum.
    Hoping you’re getting sleep now ( not after you’re dead:)
    Thanks! Tara

    • fl_litig8r says:

      You kindly point out that their offer does not even cover your mother’s liens, much less the pain and suffering you had previously been assured would be included. It could be that they are employing the clumsy tactic of offering an amount that, after “splitting the baby” with your demand, is the amount for which they wish to settle (a little under $30,000.00). I think dropping down to $36,500.00 may be a bit too much so early in the process. Before you make any significant move, you want to see how they move as well. So, if you were to drop to $40,000.00 and they were to come up to $19,000.00, that would indicate that they want to meet in the middle of the first two offers. If they come up less, they may be trying to drag it down to $25,000.00 or less. I know you want this to over, but unfortunately patience and feeling the other side out is part of the game.

      You can rest assured that they will pay Medicare, because if they don’t Medicare can come after them just as easily as they could go after your mother — of course, if you have a release indicating their agreement to pay Medicare, I see no reason why Medicare would come after her at all. I’m not sure what you’re asking with respect to how you “handle” the payment to Medicare and Optum. If you already have the lien information (and have checked to ensure that it only includes bills related to the accident), the ensuring that Walmart’s agreement to directly pay these liens in the release should be enough. After the payment has been made, you can request confirmation in writing from both lienholders that their liens were satisfied.

  3. Jess Delaney says:

    In Sept 2013 I was working for a company and was rear-ended while in the company vehicle. My neck was tweaked in this accident. I did not go to the emergency room but reported the accident immediately to the company and they sent me to their designated Workers Comp Dr @ US Healthworks that day. Since then I have had approximately 33 visits for PT, some Chiro and Dr. Exams. They just performed an MRI and I have now reached MMI. I still have some soreness when tilting my head to either side and sometimes this effects my sleep and I awaken with a headache. I will be negotiating with the drivers insurance company for my pain and suffering and also for future pain and suffering (which is an unknown). Because the Total Medicals figure in to determining the settlement, (if only for a “rule-of-thumb”), I will need to know the total cost of the treatments. How do I get that total? US Healthworks says they don’t know and that that information is something their billing dept does with the Insurance carrier of my now former employer. I called my former HR Department and they were no help and said I would be told by the Insurance carrier of the woman who rear-ended me. Is her company obligated to tell me the truth? This almost seems like a conflict of interest here??? I don’t anticipate this being a very large settlement, probably not enough to interest a PI Attorney. I would appreciate your insight into any of this.

    • fl_litig8r says:

      The subrogation department of the workers comp insurer will tell you how much it paid, as it almost certainly has the right to be reimbursed from your settlement. You can probably negotiate the amount of the reimbursement down, because all settlements are compromises, but expect to have to pay them back something. You can’t just claim that a settlement is for pain and suffering alone to avoid the w/c carrier’s subrogation rights. Perhaps if you explained to your former employer’s HR rep that it would help the employer to give you the insurer’s contact info (if you can’t just get it on your own), because any amount the insurer is reimbursed will reduce the overall amount of the claim which might cause a premium increase, he or she will be more cooperative.

  4. Allen says:

    My ex wife stopped court ordered visitation between my 13 year old son and I in February 2014. She was over an hour late for an exchange and I asked her to bring him to my home (we both travel 45 minutes because we live 1.5 hours from each other). She refused and went back home and stopped all phone contact and visitation. I filed contempt charges on my own at which time she hired an attorney asking for me to give up my rights (claiming verbal abuse to her and my son) or she would raise child support (change of venue from Arkansas to Louisiana where we both now reside). I obtained an attorney in April 2014 and I we received an order from the Judge in May 2014 to get a psych eval. I called the Psychiatrist who stated he longer did them and passed that info on to my attorneys paralegal. I continued to call and email but never received the name of another evaluator (or any info at all). Then 5 days before my August court date my attorney’s paralegal contacts me stating I needed to contact such and such to set up an eval, send her all this personal info and so on. Then on the evening (after 5 pm) prior to my court date the paralegal called me again to tell me my attorney would not be going with me, his “assistant” would (brand new attorney) and that this would not be on custody issues because I had not done the eval. I went to court and the assistant was unprepared. I was told my child support would now be 110% higher (with no change in income), I owed retroactive child support for the 6 months of no contact (I paid my regular child support and my childs medical the whole time I have not seen him), back medical for the 6 months of no contact because she never sent me any bills plus the evaluation fee for an eval I still had to do ($5000 altogether). Court has held off till January 2015! A year without my son. This was two weeks ago and I still haven’t seen my attorney. No returned calls or emails. I have spoken to his paralegal once who said they were filing an “appeal”. I can’t afford all of this as I took out a loan just for the attorney fees. I am being held accountable by the court for “refusal to participate in a court appointed evaluation” even though I was never informed of the evaluation by my attorney. Any advice would be helpful because I do not want to go to jail and I haven’t done anything wrong. I just want to see my son. Thank you!

    • fl_litig8r says:

      I am sorry to hear about your situation with your son (and your lawyer), but unfortunately I don’t have any family law experience (much less any experience with the laws of either state relevant to your issue) from which to give you any guidance. This is way too specific an issue in an area of law I’ve never practiced for me to even attempt an educated response. You could try running this by a JustAnswer lawyer. While they’re not free, I’d expect that you’d get a response for $50 or less — one from a lawyer who knows this area of law far better than I.

  5. Jamie says:

    Hello… I had a quick question about insurance. I signed up for direct debit dental insurance about 10 years ago. I changed jobs about 6 years ago, and had tried to find/contact the company (Assurant) to stop it. I sent letters, tried to call, every address I used seemed to be a “wrong” address. So, they’ve been direct debiting $18.63 from my account for over 6 years without me using their services. I haven’t received a single communication from them in all that time. Two months ago I finally received a notice that my so called dentist – which I’ve never seen was no longer going to be a part of their insurance.
    I immediately wrote them a letter, asked them to stop debiting my account and asked them to refund me for at least five years that they have taken my money without service.
    Today I received a letter stating that 1. that my dental policy is still active and they will still be debiting that amount 2. that my request for refund would not be fulfilled because they paid fees to my “so called dentist” (whom I have never even seen) each month for “services.” 3. That I needed to contact them to discuss if any action needed to be made regarding my account.

    It sounds like they are really stretching some things here…

    • fl_litig8r says:

      I don’t know that you’re going to have much luck getting back the past 5 years’ worth of payments, absent proof that they actually received your cancellation request that far back. It doesn’t really matter that you didn’t actually use the service — it was available to you during that time, like how you can’t get a refund on your health insurance if you never saw a doctor for years. Their representation about paying your dentist may just be how their arrangement works — they may pay dentists a certain sum every month out of their premiums just to have them be a part of their program. I don’t really know how all these quasi-insurance businesses work.

      Considering that they clearly received your last correspondence, I’m a bit concerned that they didn’t cancel your contract upon receipt. Why you’d need to contact them “regarding your account” when you already stated that you wished to cancel seems like they’re just trying to squeeze an extra month or two out of you while they drag out the cancellation process. I’m assuming they provided contact information, so call them and cancel (again).

      Consumer claims are really outside my wheelhouse, so I can’t tell you all the possible remedies available. You should contact your bank about revoking any authority the dental insurer has to debit your account (or blocking future debits). If you think it’s worth your time, it might be worth reporting to your state consumer protection agency or attorney general. I doubt that any private lawyers would be interested just because of the low amount at issue.

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