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When Does Gap Insurance Not Pay?

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When buying gap insurance, one of the questions to ask before signing the agreement is, “When does gap insurance not pay?” The guaranteed auto protection policy is beneficial when it is needed, but it’s important to know what circumstances would result in no payment. Understanding the ins and outs of gap insurance helps avoid any surprises about payouts.

Image via Flickr by adrian8_8

What is Gap Insurance?

If you are buying or leasing a new vehicle, gap insurance may be beneficial, especially if the amount you owe on the loan is more than your regular vehicle insurance will pay if a claim is filed. In the event your car is stolen or totaled after an accident, gap insurance covers the difference, or “gap,” between the remaining balance owed on the vehicle and its current cash value.

For those who are financing the purchase of a vehicle, it may be a requirement by the lender to acquire gap insurance. This is especially true when the purchase is for certain types of vehicles, such as sports utility vehicles, electric vehicles, and luxury sedans. The dealership where the vehicle is being purchased or leased may offer gap insurance, but it is best to get quotes from several sources. In this way, you can compare rates, which will vary for each company.

To check on the value of your vehicle, visit the Kelley Blue Book website and fill in the form.

Is Gap Insurance Worth Buying?

Whether to buy gap insurance depends on several factors to consider. These include:

  • The outstanding balance of the loan exceeds the actual value of the vehicle.
  • The down payment amount was minimal and less than 20 percent of the price.
  • If the car was totaled, you would not be financially able to pay the difference between the loan and the value of the vehicle.
  • If the vehicle is driven over 15,000 miles annually, the rate of depreciation is accelerated.
  • Some makes and models depreciate faster than others.

Buying gap insurance is not necessary if the vehicle is purchased outright for cash and there is no loan or monthly payments. Instead, it is most helpful in situations where the owner owes more than the vehicle’s actual value.

In addition, buyers who pay a high down payment or make consistent payments may also not require gap insurance. Similarly, there may be no need for one if the make/model’s value does not quickly depreciate over time.

How Does a Gap Insurance Payout Work?

How the payout for gap insurance works is easily explained with the following example. A customer buys a vehicle at the dealership for $25,000 and pays $1,000 as the down payment. The loan agreement is for $24,000 with zero percent interest and payments for 60 months of $400. The owner has also purchased collision coverage that has a $500 deductible. A short time later, there is an accident, and the vehicle is totaled.

The actual cash value of the vehicle is then determined by the insurance company, which puts its current value at $21,000. The loan balance at the time is $23,000. That’s a difference of $2,000. The gap insurance pays the difference, excluding the $500 deductible, for a total payout of $1,500. (Some insurers will include payment of the deductible in gap insurance, but not all do, such as in this example.)

Once the vehicle is determined to be a total loss, and the claim is filed and accepted, it can take anywhere from five to 45 days for the policyholder to receive payment.  Gap insurance will payout as long as a total loss claim has been filed and approved. If there is any negative history, such as a missed payment on the loan, that amount would be deducted from the gap payout.

What Is Not Covered with Gap Insurance

Gap insurance is not stand-alone coverage. It works along with collision, comprehensive, and liability insurance. There are things that gap insurance does not cover and does not pay for, such as the following.

  • Any balance carried over from previous vehicle leases or loans
  • Payments overdue for a loan or lease
  • Credit life insurance or extended warranties to go along with the initial lease or loan
  • Any monetary penalties incurred for excessive use included in a lease agreement
  • Security deposits that the lessor has not refunded
  • Any amounts for towing, wear and tear, storage, and prior damage deducted by the insurer
  • New equipment, other than already installed factory-equipment
  • Mechanical issues, such as engine and transmission problems

Gap insurance does cover theft when the vehicle is stolen and is not recovered. The insurance works in conjunction with the owner’s comprehensive coverage. The actual cash value of the vehicle, less the deductible, is paid by the comprehensive portion of the policy. Gap insurance then pays the difference between the balance of the loan and what was paid out.

When Does Gap Insurance Not Pay?

Gap insurance pays out if the car is totaled and there’s a difference between the balance of the loan or lease and the actual value of the car. It is not used for vehicle repairs or replacement parts if the vehicle is damaged only instead of totaled. A payout is also not possible if payments have not been made to keep the insurance active. Other things gap insurance does not pay for include the following.

  • Rental car usage due to an accident or stolen vehicle
  • The purchase of a new car
  • Adding extended warranty coverage
  • Medical expenses resulting from injuries sustained in an accident are covered by each person’s liability insurance
  • Lost wages due to an accident
  • Damage to another vehicle or a person resulting from an accident that falls under property damage or liability insurance
  • Car payments

Buying gap insurance can be beneficial for those who are buying or leasing a vehicle, while for others, the additional coverage may not be necessary. When deciding to buy or not to buy, ask the insurance agent or the person handling the lease agreement questions about what their policy covers and when does gap insurance not pay based on their policy requirements.

FIXD Research Team

At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.

We’re here to help you simplify car care and save, so this post may contain affiliate links to help you do just that. If you click on a link and take action, we may earn a commission. However, the analysis and opinions expressed are our own.

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About the Author

FIXD Research Team

FIXD Research Team

At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.

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