There’s a common myth out there about gap insurance coverage. Some drivers believe that paying into this type of coverage is always worth it because it’ll help you pay back any money owed on your car, but that is not precisely true.

While it is true that gap coverage insurance exists to help you pay back money owed on your car when your car is totaled in an accident, there are specific situations when this coverage can be used. It will not apply in all situations, and that is what you should be aware of as a car owner.

Today, we’ll learn the specifics of what gap coverage is, why it exists, and how it might benefit you to invest in adding this coverage to your current insurance bundle.

What Is Gap Coverage Insurance?

Gap coverage insurance is an optional car insurance coverage. This type of accident coverage aims to help cover the “gap” between any money that you owe on your car and the actual value of your car.

What Is Your Car’s Actual Value?

The actual value of your car is also known as the “actual cash value (ACV).” This value is not what you originally paid for the car. That is because vehicles begin to depreciate as soon as you take them off of the sale lot, so your car is worth less almost immediately. The ACV of your car at the time of the accident is the monetary value of the car when an accident occurs.

How Does Gap Coverage Work?

The best way to understand how this relatively complicated type of auto insurance coverage works is to work through an example situation. Most of the potential confusion about it can be cleared up this way.

Imagine this situation:

You are in a car accident. The accident is not your fault, but your car is damaged beyond repair. The auto insurance company decides this, and they determine the specific cash settlement that you will receive.

The auto insurance company determines that your car’s ACV, actual cash value, is $10,000. At the time of the accident, your auto loan still sits at $12,000.

In that situation, there is a $2,000 gap between what your car is worth and what you owe on the car. Gap coverage would help to cover this gap.

What Does Gap Coverage Insurance Cover?

The specifics of what this type of insurance covers will depend on what auto insurance company you purchase the policy from. Each has its specific rules and regulations, so you will want to check them out specifically before making your final decision.

Generally speaking, though, this insurance type typically only covers the following:

  • Negative equity: It is the term used to describe the gap between your auto loan principal and your car’s actual value. If you have a gap as a result of a covered accident, the gap coverage will kick in and help defray the difference.
  • Theft: This insurance may be applied in situations where cars are stolen and never recovered. Some insurance companies classify this as a total loss from a covered event, especially if you have comprehensive coverage, and would allow the gap coverage to kick in.

What Does This Insurance Not Cover?

There are some common misconceptions about gap coverage insurance. Often, people assume that this type of coverage will defray the costs that it will not affect. It does not typically cover the following items:

  • Deductible cost: If your car insurance deductible is $1,000 and the “gap” in your coverage is $1,000, you will only receive $500 as a result of the gap coverage. You are still responsible for handling your deductible in this way.
  • Specific part failure: Some people believe that this coverage can help them if a major part of their car, such as the engine, fails. In most cases, gap coverage only applies in situations where a car is considered a complete loss after a covered accident.
  • Death or injury: Gap coverage in no way applies to medical costs, income back pay, or any other financial issues related to injury or death caused by a covered accident. Gap coverage insurance only applies to the loss of a vehicle.

Is This Auto Coverage Right for You?

If you will be leasing a car or you know that you will owe money on an auto loan for the next few months or years, gap coverage might be something that you are considering. How can you decide if this type of insurance is right for you?

When Leasing

First, consider your lease. If applicable, your lease might require you to have this type of coverage. While it’s less common for leases to require gap coverage, your car lease terms typically specify the types of auto coverage that you are required to have.

If you are not required to have gap coverage, you still may be interested in having it. Signing a car lease is committing to specific payments; an accident could disrupt what you can pay and leave you owing a ton of money in a situation where gap coverage could have helped.

When Financing

Second, consider whether or not you will be financing your car. If you are financing your car, you should take gap coverage into serious consideration. Should an accident occur before you completely pay off your loan, the chances are high that you would not get enough money in the settlement to pay off your auto loan. For that reason in and of itself, gap coverage is worth it for those who are financing.

If you are not financing, you do not need this insurance. Having your other basic car insurance, comprehensive or otherwise will cover you if you total your car.

Decode the Myth

The myth of gap insurance can be a hard one to navigate, but you do not need to become overwhelmed by this coverage option. It comes down to these questions:

  • Are you financing your car without a large down payment?
  • Are you financing a costly car?
  • Do you want to avoid the risk of being in-the-hole after an accident?

If you answered yes to any of the questions above, it is worth your time to do further investigation into specific gap coverage options to protect yourself in case of a serious accident.