What is gap insurance and do I need it when filing a car insurance claim?

What is gap insurance, and do you need it when filing a car insurance claim? Gap insurance can provide you with a comfortable financial safety net after a total loss because you can use it to pay off the rest of your auto loan or lease.

Many choose to add it to a full coverage car insurance policy, but figuring out whether you actually need it can be confusing.

Here’s a breakdown of what gap insurance is and some things to think about as you decide whether to add it to your auto policy.

Why You Don’t Need Gap Insurance When Filing a Car Insurance Claim

Guaranteed Asset Protection (gap) insurance refers to a kind of coverage you can use to pay off the amount you still owe on your vehicle if your insurance company declares it a total loss after an accident. Typically, gap insurance is an optional addition to your car insurance coverage.

Even if you don’t have it, you can file a car insurance claim. If you’re in an accident and the damage renders your vehicle a total loss, your insurance company typically pays out according to the car’s actual cash value (ACV).

In some situations, your ACV is less than what you still owe on the car, and this is where gap insurance comes in.

For example, suppose you have a 2021 BMW, and you still owe $22,560 on your car loan. You get in an accident, and your precious Bimmer gets declared a total loss. But the insurance company gives it an ACV of $20,000.

If you have gap insurance, your insurance company will give you the $20,000 (minus your deductible) plus an extra $2,560 to cover the balance of your loan.

Ways Gap Insurance Can Help When Filing a Car Insurance Claim

Similarly, if you have a longer-term loan agreement, you may have a lot left on the principal balance, making gap insurance a particularly effective financial tool. For instance, suppose you bought a $35,000 car, put $4,000 down, and took out a 72-month loan for the remaining $31,000.

With a 7% APR, you’d only be paying about $529 each month. If you got into an accident a few months later, because your longer-term loan gives you such a low monthly rate, you may have only paid off a few hundred dollars.

The “gap” between what you owe and the car’s ACV could be considerable. But with gap insurance, there’s no need to worry. Your policy pays off the rest.

Depending on how much gap insurance costs, it may be the deal breaker between a low-payment, long-term loan, or one that’s a little too risky. Regardless of the types of car insurance coverage you’re considering, the option of lowering your monthly car payments may make it a viable option.

How to Offset Depreciation With Gap Insurance

Gap insurance is especially valuable because some cars depreciate very quickly, losing thousands in value the moment they roll away from the dealership. But with gap insurance, it doesn’t matter how much value your car has lost over time.

Your policy can make up the difference, paying for the difference between what you owe and the car’s ACV. That’s why it may be useful to consider how much gap coverage costs when you compare car insurance quotes.

Low Down Payments and Gap Insurance

If you chose to finance the vast majority of your car purchase, putting only a small amount down, gap insurance can be a financial lifejacket after a total loss. In many cases, loan agreements that started with a small down payment still have a substantial amount left in premium payments.

And because your earlier payments go mostly towards paying off interest, you can use gap insurance to cover what may be a significant balance.

Case Studies: The Significance of Gap Insurance in Car Insurance Claims

Case Study 1: Homeowner’s Insurance

Maria, a homeowner, experienced a devastating fire in her house due to an electrical malfunction. The fire caused extensive damage to her property, destroying valuable belongings and resulting in the need for extensive repairs.

Fortunately, Maria had comprehensive homeowner’s insurance that covered the cost of rebuilding her home and replacing her damaged belongings. Without insurance, Maria would have faced significant financial hardship and struggled to recover from the loss.

Case Study 2: Auto Insurance

David was involved in a severe car accident caused by another driver who ran a red light. The collision resulted in extensive damage to David’s vehicle, as well as injuries that required medical treatment.

Thankfully, David had comprehensive auto insurance coverage that included collision and personal injury protection. His insurance company covered the cost of repairing his car and his medical expenses, allowing him to recover without bearing the financial burden of the accident.

Case Study 3: Business Liability Insurance

Emily owns a small bakery and recently introduced a new line of gluten-free products. Unfortunately, a customer who purchased one of the gluten-free items experienced an allergic reaction due to cross-contamination.

The customer decided to sue Emily for negligence, claiming damages for medical expenses and emotional distress. Luckily, Emily had business liability insurance that covered legal expenses and the settlement amount, protecting her bakery from significant financial strain and reputational damage.

Final Thoughts on Why Gap Insurance Can Be Helpful When Filing a Car Insurance Claim

Even though you can’t control how your insurance company will value your vehicle after an accident, you can use gap insurance as a powerful financial buffer. Whether it’s depreciation, a small down payment, or a long-term loan agreement, you may find that you owe a significant amount after a total loss.

Gap insurance simply pays off what you owe — in addition to the actual cash value you get for your car. But gap coverage is typically optional. For drivers who have shorter loan agreements or who’ve made significant down payments, gap insurance may have little benefit.