Gap insurance covers the difference between the cost of your car and the value your insurance company is willing to pay for it. This type of insurance is also called "totaled" insurance because it is used if you total your car. When the insurance company will not cover the total cost to replace the car (or the amount you owe on a loan), you may have a "gap" you need filled with another insurance line.

Gap Insurance May Come From a Dealer

One way to ensure you get gap coverage is to seek it through your dealer when you purchase your car. Most dealers will be happy to assist you with this coverage, though it may be more expensive through a dealer. One way to offset the expense is to apply it to your loan if you are also financing your car through the dealership. You can then pay off your insurance premiums as you pay off your loan each month. You can also seek a reduction in the cost of your vehicle if you purchase your insurance through the dealership as well.  

Your Insurance Company May Offer Gap Insurance

Before you purchase care insurance through any other party, check with your existing insurance company. You may already have gap coverage and just not know it. You may also be able to very cheaply add the coverage line to your existing policy. When you add an additional line of coverage to an existing policy, it will usually be less expensive than getting a whole new policy. 

You May Get Gap Insurance on an Old Vehicle

Gap insurance is easiest to buy for a brand new vehicle. Getting gap coverage for an older vehicle is difficult because the vehicle’s value is not easily determined. Instead of relying on dealer invoice or a sticker price, your insurer will have to research the going price for your vehicle and assess wear and tear to your exact car. This means they will have to use a price index, such as the Kellye Blue Book or the National Auto Dealer Association. The estimate may be low, which would again leave you without sufficient coverage. Some insurance companies will not provide gap coverage on an old vehicle for this reason alone; it is very hard to estimate effectively.

Gap Insurance Protects you on a Recourse Loan

When you total a car you have financed, your insurance payment should go to pay off the existing loan. Any funds left over can be applied to the purchase of a new car. When there is a gap in the value of the vehicle and what you owe, you may end up owing additional funds to your lender even after handing over the insurance money. If you are in a non-recourse loan, you will not be responsible for this difference. The lender assumed this risk before the car was totaled. However, if you are in a recourse loan, you assumed the risk of this happening, and you will have to pay.

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