If you have a car loan, it’s advised that you purchase gap insurance coverage in the event your vehicle is totaled in an accident or stolen. While your standard auto insurance policy will pay out for the amount the car is valued at, they will not pay out for money owed on the car loan. The amount valued will be determined by the actual cash value (ACV), which is equal to the cost of the car when it was new, minus depreciation, which factors in age, mileage, physical condition, etc.
Gap insurance essentially insures the remaining payments on your auto loan if your car is totaled. When purchasing a car at a dealership, if financing the purchase , it’s not uncommon for the dealer themselves to offer gap coverage. While it is required in the state of Florida to obtain auto insurance, gap insurance is not required by the state; however, the financial institution you secure your auto loan with is permitted to require the purchase of gap coverage.
If you purchase gap insurance coverage through an automobile dealership, it’s likely you will be paying more than if you were to add the gap coverage to your existing auto insurance policy.
Without gap insurance individuals can be left with no car, and a big bill to pay. After just a year, the ACV of your car can be thousands of dollars less than what you paid for it, leaving you with an expensive loan balance.
If the balance on your loan is $20,000 and the actual cash value of your car is $15,000, your insurance company will pay out $15,000 (minus your deductible), if your car is totaled or stolen. This leaves you with an additional $5,000 owed for your car loan. The total payout with gap coverage would be the full amount owed on the car ($20,000) rather than the actual cash value.