Closing the Gap—With Gap Insurance

Just when you thought you knew everything about insurance—and had insured yourself to the max—along comes gap insurance.
Though it may sound trivial, gap insurance is a must for leasing. And it applies to certain other circumstances too. But first, let's look at why it exists.
As the name implies, gap insurance applies to an amount of risk for which you are not covered for. In other words, it closes the gap between what your insurance company pays if your car is stolen or totaled, and what you owe the finance company.
Let's take a test case. Say you bought your car two months ago for $25,000. You begin making payments at about $500 a month based on a 9 percent interest rate. Then, disaster strikes. A tree falls on your car and squishes it.
You call the insurance company and they look into their crystal ball and declare that your car, at the time the tree sat on it, was worth only $20,000. Even though the car is only a couple of months old, it has lost 20 percent of its value. Well, OK, you say, I'll take the $20,000. Unfortunately, the finance company still wants the full amount you owe them. With interest, tax and license fees they figure that to be $27,000.
Yikes! There is a gap of $7,000 between the $20,000 that the insurance company is willing to pay you, and the $27,000 the finance company is demanding. If, at this moment, you have gap insurance you are not bothered by this situation at all. If you don't have gap insurance you are going to be having Spam for dinner for the next two years.
That's why it's so important to think ahead. And that's why gap insurance is a must for many drivers. When you are leasing a car it is essential. In fact, gap insurance is usually mandated by lease contracts or included within them. If a gap policy is required but not included in your contract, you should shop around for this coverage (insurance companies sell it). If gap is included in the lease, check to see how much coverage is offered and how much you're going to be paying for it. (In some cases, lease contracts may include what is known as a gap waiver, which protects you from gap charges in the event that the leased vehicle is declared a total loss -- eliminating the need for a gap policy.)
Is gap insurance necessary for people who finance their cars? Well, it depends on your coverage. If your regular insurance policy is written to pay off the fully financed amount, then you don't need gap insurance.

A few things to keep in mind when buying gap insurance:

  • Although most people purchase it when a lease is initiated, some insurance companies will sell you a gap policy anytime during the lease term.
  • You must be in compliance with all terms of the lease.
  • Your gap insurance policy may not be honored if you don't have collision and comprehensive insurance coverage. Further, lease contracts generally require that you carry collision and comprehensive at all times.

To summarize—when initiating a new loan or lease, always remember to ask your insurance agent or loan officer about gap insurance. If you have an accident you'll be glad you planned ahead

If your car is totaled, or stolen, carefully follow all requirements made by your insurance company. For example, some companies require you to continue making loan payments on your totaled car until the money from the gap insurance is paid out.


1. When buying a house: Contact a Realtor

2. When having legal problems: Contact a Lawyer

3. When having medical problems: Contact a doctor

4. When buying a car

Call DAG: (844) 509-4752