Gap Insurance

Gap insurance provides the policyholder with protection from the negative equity that could occur if the vehicle is “totaled” in an accident.

For example, a customer owes $20,000 on his car and is in an accident. The insurance company claims the vehicle to be a total loss or “totaled.” However, when the insurance company pays the claim, it assesses the vehicle replacement value to be only $15,000. This leaves the vehicle’s owner with a $5,000 balance he must pay to satisfy the loan. Gap insurance would then pay that $5,000 balance and satisfy the loan.

This insurance could be valuable for customers who have transferred their Inequity from their trade-in, that is, if they traded a vehicle in which they were “Upside-Down” and transferred that extra amount to their new loan. Also, in states like California, where there is a substantial sales tax, gap insurance would cover that extra balance. Of course, if a buyer makes a large down payment, his outstanding balance should be consistent with the car insurance’s coverage and gap insurance would not be necessary.

Gap insurance is available on leases as well as loans. In fact, many leases will include gap coverage automatically. In this case, it will be defined in the lease contact and not itemized as an insurance cost. If the “F&I” claims that gap insurance is included and then upon signing the contract, it is listed as a premium, it is not included and can be removed at the customer’s request.

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