How does GAP insurance work after totaling a car?

You are responsible for paying off your auto loan, even if the vehicle is stolen or totaled in a car accident. In addition to covering your car insurance deductible, you’ll need to pay the remaining loan balance out of pocket since your insurance payout won’t fully cover the cost of the loan.

But, with guaranteed asset protection (or GAP insurance), you won’t be left in a bad place financially. Here’s how GAP insurance works after totaling a car. 

How does GAP insurance work?

According to the Insurance Information Institute (III), cars depreciate by 20% within the first year of ownership. This leaves drivers with an auto loan balance higher than their vehicle’s value, putting them at risk of paying thousands of dollars out of pocket if their vehicle is totaled in a car accident.

GAP insurance is designed to keep drivers financially safe if their vehicle is totaled by covering the difference between the remaining loan amount and the vehicle’s depreciated value

Read More: How Much Car Insurance Coverage Do You Need

For GAP insurance to do its job, drivers must purchase full coverage car insurance and/or collision coverage. This type of car insurance is usually required when the vehicle is leased or financed.

Comprehensive insurance covers the cost of damage due to a rollover or collision with an object or vehicle. Collision insurance covers the cost of loss due to theft or damage caused by something other than a vehicle or object. 

For example, let’s say you financed a new vehicle for $30,000. After 12 months, you’ve paid off $5,000, leaving a balance of $25,000. During that 12 months, your car’s value depreciated. It is now worth $24,000.

Following an accident, you pay your deductible, and your insurance would cover up to $24,000, which is less than the remaining loan amount of $25,000. GAP insurance would cover the $1,000 difference, meaning the only out-of-pocket cost to you would be the deductible.  

Free Car Insurance Comparison

Enter your ZIP code below to view companies that have cheap car insurance rates.

 Secured with SHA-256 Encryption

What does it mean when a vehicle is totaled? 

When a claim is filed, your insurance company will decide if your vehicle is repairable or a total loss. It will send a claims adjuster to determine the value of the vehicle and the cost of repairs.

A vehicle is considered totaled if the repair cost is more than the vehicle’s value.

If the vehicle is totaled, the insurance company will pay the policyholder or auto lender the car’s value. However, if the repairs cost less than the value of the vehicle, your auto insurance company will pay to repair the vehicle, minus your deductible.

For example, if your vehicle is valued at $7,000, but the cost of repairs equals $9,000, your insurance company will pay you or your auto lender the car’s value, which is $7,000. 

Is GAP insurance necessary for all car owners? 

GAP insurance is not necessary for all car owners; for example, you don’t usually need GAP protection on a used car. However, it is recommended for drivers who lease or finance their vehicles. If the vehicle is financed, you should carry GAP insurance until the vehicle’s value is lower than the remaining loan balance. Once that occurs, you won’t need GAP insurance to cover the difference between the car’s value and the remaining loan balance.  

For example, let’s say you total your vehicle when your loan has a remaining balance of $5,000. If the vehicle is valued at $10,000, you will pay the auto lender $5,000 to cover the loan and have $5,000 for yourself. 

Is GAP insurance the only way to protect me if my car is totaled? 

GAP insurance isn’t the only way for drivers to protect themselves when their car is totaled. Ensuring they have the money to repay the auto loan is important, but car replacement may be more of a priority than repaying the loan. 

In addition to or instead of GAP insurance, drivers can purchase new car replacements from some companies. With new car replacements, policyholders receive money from the insurance company to purchase a vehicle of the same make and model as the totaled vehicle.

Not all insurance companies offer this type of coverage, but it can benefit drivers who can afford the deductible but cannot afford a new vehicle. 

Free Car Insurance Comparison

Enter your ZIP code below to view companies that have cheap car insurance rates.

 Secured with SHA-256 Encryption

The Bottom Line: How does GAP insurance work after an accident? 

The right type of car insurance coverage can save drivers money. Supplementing comprehensive and/or collision insurance with GAP insurance is optional.

Still, it can protect drivers from paying thousands in out-of-pocket costs if their vehicle is stolen or totaled in a car accident. This is especially important for drivers to consider if they simply can’t cover the cost of the loan if something were to happen to a vehicle they have leased or financed. 

Case Studies: How GAP Insurance Works After Totaling a Car

Case Study 1: Loan Balance Exceeds Actual Cash Value

John purchased a car through financing, and he has GAP insurance coverage. Unfortunately, he gets into an accident, and his car is declared a total loss. The actual cash value of the car, as determined by the insurance company, is $15,000.

However, John still owes $18,000 on his car loan. In this case, John’s GAP insurance coverage will bridge the gap between the actual cash value and the remaining loan balance, paying off the $3,000 difference.

Case Study 2: Leased Vehicle and Depreciation

Sarah leased a car and opted for GAP insurance. After a few months, her car is involved in a severe accident, resulting in a total loss.

The leasing company determines the actual cash value of the car to be $20,000, while Sarah’s remaining lease balance is $23,000. In this scenario, GAP insurance will cover the $3,000 difference, ensuring that Sarah does not have to pay out of pocket for the remaining lease balance.

Case Study 3: Deductible and Out-of-Pocket Expenses

Mike has a car loan and GAP insurance coverage. His car is totaled in an accident, and the insurance company determines the actual cash value to be $25,000. Mike’s remaining loan balance is $23,000, but he also has a $500 deductible. In this case, GAP insurance will cover the $1,500 difference between the actual cash value and the loan balance after deducting the out-of-pocket expense of the deductible.

Case Study 4: Exclusions and Limitations

In this case, Samantha financed her car and has GAP insurance coverage. Unfortunately, her car is totaled due to flooding. However, Samantha discovers that her GAP insurance policy does not cover losses caused by natural disasters. As a result, she is responsible for paying the remaining loan balance, even though the actual cash value of the car does not cover it entirely.

Free Car Insurance Comparison

Enter your ZIP code below to view companies that have cheap car insurance rates.

 Secured with SHA-256 Encryption