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What is Gap Insurance?

Posted on: June 3, 2021

New Jersey requires drivers to carry liability insurance as well as personal injury protection. Both help cover costs associated with a car accident caused by either the driver or another motorist.

Many drivers also choose to add gap insurance to their policies for extra protection. Gap insurance can be beneficial for some drivers, although it may not make sense for others. 

Overview of Gap Insurance

Gap insurance is an optional coverage that can help drivers cover the cost between what they owe on the car and the car’s actual cash value (ACV) in an accident.

Cars depreciate the minute they are driven off the lot, up to 20 percent in the first year alone, on average.  If a vehicle is totaled in an accident, an insurance settlement may not cover what the driver owes on the vehicle’s loan or lease. Unfortunately, this could leave the driver with no car and a sizable bill.

Gap insurance can help drivers avoid this scenario. Gap coverage would apply if the vehicle was stolen and not recovered, as well.

Some lenders require gap insurance. For those who lease, gap insurance may be included in the cost. It is best to check.

What is the ACV?

A vehicle’s ACV is its monetary value at the time of an accident, not what a driver paid for the car.

A driver’s liability, collision, or comprehensive insurance can help pay for the replacement of a vehicle if it is deemed a total loss in an accident. However, insurance will only pay up to the policy limits and the car’s ACV.

The ACV is equivalent to the car’s cost when new minus depreciation for mileage, age, physical condition, and other factors. Even after one year, there may be a considerable gap between the car’s ACV and the balance on the loan or lease. Gap insurance can help cover that difference.

Here is an example: A driver pays $40,000 for a new SUV. She puts $5,000 down, leaving a loan balance of $35,000. Unfortunately, she is in an accident, and the SUV is totaled. The vehicle’s ACV at the time of the accident is $30,000. However, she has a deductible of $1,000, so the insurance company then pays out $29,000, leaving a gap of $6,000 between the vehicle’s ACV and the driver’s loan balance. Gap insurance can help cover that difference.

What Does Gap Insurance Cover?

Drivers must be aware of the following before purchasing gap insurance, so there are no surprises when using it.

Gap insurance covers the following:

  • Loss of the vehicle. Gap insurance will cover loss of the vehicle in an accident, but not damages to the car if it is not considered totaled, other property damage, or bodily injuries to the car owner or others involved in the accident.
  • Negative equity. This is another term for the gap between the loan balance and the ACV. Negative equity is sometimes referred to as being upside down on a loan.

Gap insurance does not cover the following:

  • The insurance deductible. The insured person must still pay the deductible in an accident.
  • Mechanical repairs. Gap insurance will pay out only if the vehicle is a total loss in an accident. It does not cover repairs.
  • Other property damage. Gap insurance applies only to the total loss of the insured vehicle, not to damage sustained by other vehicles or property.
  • Bodily injury, medical expenses, and lost wages. Gap insurance does not cover anything but the total loss of the vehicle. 
  • Death. Gap insurance does not cover funeral costs or any other expenses related to illness or death stemming from an accident.

When is Gap Insurance a Good Choice?

Gap insurance may make good financial sense in the following circumstances:

  • Loan length of more than three years. A driver with a loan length of more than 36 months will have a lower monthly payment but will pay more for the car in the long run. That means there is a longer period when the car’s ACV will be less than the loan balance. Gap insurance can be helpful in these cases.
  • A loan has a high interest rate. The idea behind this is that it will take longer for the owner to pay off the loan principal versus how long it will take the car to depreciate. Gap insurance can help cover this difference.
  • Low down payment. Gap insurance may be advantageous if the owner makes a low down payment, less than 20 percent. Again, the more debt there is to begin with, the larger the gap between the ACV and loan balance and the more beneficial gap insurance may be.
  • The vehicle is known to depreciate faster than other vehicles. Some makes and models of vehicles do not hold their value as well or as long as others. It may make good sense to have gap insurance to cover this more rapid depreciation in the event of an accident.
  • The vehicle is leased. Gap insurance is often included in a lease amount, so drivers should be sure to check. There is no need for double coverage.
  • The vehicle has reached the point at which there is no gap between the vehicle’s ACV and the loan balance. Gap insurance can then be canceled, as it will no longer be applicable.
  • Other insurance is inadequate. Insurance companies do not offer one policy that covers everything: collision, liability, and comprehensive. Therefore, most drivers pick and choose what they cover, including what the law requires them to carry. Gap insurance may be an extra level of protection for some drivers.

What are the Disadvantages of Gap Insurance?

Most insurers do not offer gap insurance for vehicles older than six years, and they require drivers to purchase it within a short window after acquiring the car, often 30 days. Drivers need to also weigh the following before deciding whether gap insurance could be beneficial:

  • High deductible costs. A driver must always pay the deductible, even when the car is a total loss.
  • No medical coverage. A primary reason for car insurance is to help cover medical costs in an accident. Gap insurance does not cover bodily injury and medical expenses.
  • No coverage for repairs. Gap insurance applies only when the insurance company deems the vehicle a total loss. It will not cover the cost of mechanical or body repairs, so additional insurance will always be needed.

Every car owner must look at their own situation to decide whether gap insurance makes sense for them. In many cases, a gap policy with a new car purchase can be extra comforting for those who do not have a lot of extra cash available. Being covered while the loan is upside down can be an extra level of assurance.

Monmouth County Car Accident Lawyers at Ellis Law Advocate for Victims of Vehicle Accidents

Car accidents can be physically, emotionally, and financially devastating. When a negligent driver is at fault, a victim has every right to pursue compensation for the damages and costs they incur. These costs can include medical bills, lost wages, property damage, and pain and suffering. Unfortunately, insurance companies will never offer a victim a settlement for the total costs of their damages. That is why it is essential to have the Monmouth County car accident lawyers at Ellis Law on your side. We have helped hundreds of car accident victims recover compensation for their losses. We can help you and your family, too. Call us at 732-308-0200 or contact us online for a free consultation. Located in Freehold, New Jersey, we serve clients throughout East Brunswick, Toms River, Middletown, Jersey City, Neptune, Marlboro Township, Hudson County, Union County, Essex County, and Ocean County, as well as Brooklyn and New York, New York.