Enter Your ZIP Code

Understanding GAP Insurance


You have got your car lease deal all set. However, it occurs to you: “What if my car gets involved in an accident?” Technically speaking, the leasing company or manufacturer still owns the car, but you still have to replace it. Even after your car insurance company pays off all damages, carmakers may still hunt you for some dough. This is where gap insurance comes into picture.

As its name suggests, this type of insurance covers some things that traditional auto insurance does not. Thus, what does a gap policy cover? It is the difference between the worth of your car and what you owe on it. To simplify, it closes the gap between what an insurer pays if the car is totaled or stolen and what you owe the finance company.

Assume you purchased an auto three months ago for $25,000 and begin paying at $500 a month based on an interest rate of 6%. Then, disaster hits: an electric post falls on your vehicle and destroys it.

The car insurance company then looks into a crystal ball and decides that your vehicle was worth only $20,000 at the time of this incident. Your auto is only three months old and it has already lost 20% of its original value. To make matters worse, the finance company requires you to pay in full, the amount you owe them. Computing tax, interest, and license fees, the finance company figures that you owe them $28,000.

Thus, there is an $8,000 gap between the $20,000 the insurance company will pay and the $28,000 demanded by the finance company. Most people with this deal will have to eat Spam for the next year or so. However, you can still order steak if you have gap insurance.

This is why a gap policy is really a must for drivers. Usually, lease contracts mandate gap policy or included within them. In case you are required a gap policy, but it is not included in the lease contract, shop around for this kind of coverage. If gap policy is included in the lease, check how much is offered as well as how much you will pay for it.

What if you finance your car, do you need gap insurance? It largely depends on coverage. If your regular car insurance policy will pay off the financed amount in full, it may be a good idea not to get a gap policy.

One important thing to remember when buying a gap policy: although many people buy it after initiation of lease, a number of auto insurance companies will sell you gap insurance anytime throughout the lease term.