Difference insurance is a type of auto insurance coverage that covers the difference between what you owe on your car and its actual cash value if it is damaged or totaled. is an optional coverage and you should consider purchasing it if you have leased or financed your vehicle.
Read this comprehensive guide to learn what gap insurance covers and how you can get it.
what is differential insurance?
If your insurer totals your vehicle for a covered peril, such as an accident, theft, fire, flood, tornado, vandalism, or hurricane, the insurer will pay you the actual cash value of your car, if you have comprehensive and liability coverage. collision. this amount is usually considerably less than the amount you still owe on your loan or the amount owed on a lease payment.
When the amount of your actual cash value (ACV) payment is less than what you owe on your lease or loan, the loss of this financial shortfall is the “gap” you can leave owing. this is where gap insurance can save the day.
what does gap insurance cover?
If your car is stolen or totaled, Gap Insurance will pay the difference between the vehicle’s ACV and the current outstanding balance on your loan or lease. sometimes you’ll also pay your regular insurance deductible.
Car owners often assume that if their car is destroyed, it will be replaced for the amount they paid, or at least the amount they owe. This is not the case, which is why many auto insurance companies offer gap insurance (or loan/lease payment insurance) as optional coverage.
You must also have comprehensive and collision coverage to purchase gap coverage, but if you lease or finance your car, they are generally required.
What does differential auto insurance not cover?
Gap insurance generally does not cover:
- lease/loan payments due
- Costs for extended warranties, credit life insurance, or other insurance purchased with the loan or lease
- Balances carried forward from previous loans or leases
- financial penalties imposed under a lease for excessive use
- security deposits not refunded by the landlord
- amounts deducted by the direct insurer for wear and tear, previous damage, towing and storage
- equipment added to the car by the buyer, meaning only factory-installed equipment is covered
- mechanical problems, such as engine or transmission failure, or any other car problem not covered by your auto insurance policy
- You buy a car that costs $25,000 and pull it off the lot.
- After paying the down payment, you owe $24,000 in car payments over five years (0% loan interest = $400 in car payments).
- You buy comprehensive and collision coverage with a $500 deductible to protect against damage and loss.
- You have an accident while you’re still upside down on your loan or lease (meaning you owe more on a car than it’s worth) and your vehicle is totaled.
- The insurance company determines the actual cash value of the car to be only $22,000, but at the time of the loss you still owe $23,500.
- gap insurance must pay the difference plus your deductible, totaling $2,000. (note: not all gap policies pay the deductible).
- Loan payment at time of accident: $23,500
- Actual value of vehicle at time of accident: $22,000
- your deductible: $500
- physical damage insurance pays: $21,500 ($22,000 less $500 deductible)
- gap insurance pays the difference between what is owed and what the physical damage insurance company pays (plus your deductible): $2,000
- you owe more on your loan than your car is worth
- made a low down payment on your car, less than 20%
- You don’t have enough savings to pay the gap between your loan and the value of your car
- drive more than 15,000 miles a year as this speeds up the depreciation of your car
- the car model you own is depreciating at a faster rate than the typical average
- injuries: gap insurance does not cover medical bills. Your bodily injury liability would pay for the medical expenses of those you injure in an accident you cause. your own injuries would be covered by the other driver’s liability insurance or your personal injury protection or medical insurance.
- Property damage you cause: Damage you cause to another car or someone else’s property would not be covered by difference insurance, but your property damage liability would I would be.
- Damage to your car that is not your fault and does not result in a total loss: Even if your car is severely damaged, gap insurance will only cover it if it is deemed a total loss. and can no longer drive it. The other driver’s property damage liability would pay for the damage to your car. Or, collision insurance would cover you, regardless of fault. In both cases, the gap insurance would not cover the claim because the car would not be declared totaled.
- the bank or financial institution that lent you the money to buy the car
- the dealer where you bought the car
- your car insurance company
- from a company that specializes in stand-alone differential insurance policies
does gap insurance cover theft?
yes, gap insurance covers your car if it is stolen and not recovered. works with your comprehensive insurance to cover theft. Comprehensive will pay up to the actual cash value of your car, less your deductible if your car is stolen. this coverage would then pay the difference between that amount and what you owe on your loan.
how does gap insurance work?
Let’s look at an example of how gap coverage reimbursements work to protect you when you owe money on your car and it’s stolen or totaled.
This is how a “gap” is produced (using dummy numbers):
These are the line items:
what is loan or lease coverage and how is it different from gap coverage?
While the terms gap insurance and loan/lease coverage are often used interchangeably, they are typically not the same coverage. gap insurance will pay the difference between the amount you still owe on a vehicle and the actual cash value (acv) paid by your auto insurance company.
Lease/loan coverage typically has limitations on how much you’ll pay, such as 25% on your vehicle’s determined acv. both are less your deductible.
To make sure lease/loan coverage works for you, run the numbers. For example, if in the example above the vehicle was worth $20,000, then 25% of its value would be $5,000 and that is the same as the gap ($25,000 owed – $20,000 paid by the insurer and your deductible = $5,000), so there would be covered the total amount.
Do I need differential insurance?
This is why you need gap insurance:
many car owners do not take into account the depreciation that occurs with a new car. minutes after leaving the lot, a new car can be worth 10% less than what you just paid for.
In our example above, if you owned the car for three days and the car was totaled, you could owe 10% to 20% of the $24,000 ($2,400 to $4,800 out of pocket) even though you purchased full coverage .
and depreciation continues over the life of your car, especially during the first five years you own it. Based on carfax reports on current depreciation rates, the value of a new vehicle can drop more than 20% after the first 12 months of ownership. then, for the next four years, you can expect your car to lose about 10% of its value annually.
This means a new car can be worth as little as 40% of its original purchase price after five years. at least the first few years.
If I bought my car outright, do I need differential insurance?
There is no reason to buy this coverage if you bought a car with cash and own it without a loan. it is for when you owe more than the value of your vehicle. if you have the car paid for and it’s no longer financed, you no longer owe more than the car is worth, so there would be no gap coverage payment.
If I paid a high down payment, do I need differential insurance?
If you make a decent down payment, your vehicle isn’t depreciating at a steady rate, and you’re paying off the loan balance each month, you typically won’t need gap insurance coverage.
gap auto insurance is only necessary if you have negative equity on your car (owe more than the value of the vehicle), as this coverage only pays the loan balance left after the acv is paid when Your car has been determined by an insurer to be a total loss.
is gap & required by law?
While you need gap insurance if you owe more on a vehicle than it’s worth, no state requires gap coverage as part of your auto insurance policy.
gap insurance coverage is optional coverage; however, it is not uncommon for leases to include gap insurance. sometimes called auto loan/lease coverage or auto loan/lease payment coverage.
If a rental car lender requires differential insurance, it must be included in the cost of the lease. this means that the monthly price quoted by the dealer must include gap coverage when you are ordered to carry it.
There are some financial institutions that may want you to have gap coverage as part of your auto insurance policy on the car you are buying. if this is the case, your loan or lease documents should state this.
If you’ve declined gap insurance, a dealer should not be able to add it to your loan amount or otherwise charge you. Although it may be helpful if you owe more on the vehicle than your ACV and if you were in an accident, you should have the right to decline this coverage and therefore you will not be charged for it.
For example, the California Auto Buyer’s Bill of Rights requires disclosure of the price of items commonly included in loans, such as theft etching on windows and other auto parts, differential insurance or extended service contracts.
In general, dealers everywhere must provide car buyers with an itemized price list for all of these items, such as warranties and insurance, if the items are being financed.
If you are charged for gap insurance from your lender and don’t have this coverage, discuss the matter first with the finance company that added your payment. Unless you signed documents stating that you would add gap coverage to the car at the time of purchase as part of your finance or purchase agreement, you should be able to decline it and get a refund.
If you don’t want interrupt coverage and are having trouble removing it, try contacting the consumer division of your state agency. the insurance regulator’s office should be able to help you.
is gap insurance worth it?
The answer to this question depends on your situation. gap insurance may be worth it if you owe a lot more than the car is worth.
So, for example, if you bought an $80,000 car and only paid $5,000, you might want to get gap insurance so you don’t have to make up the difference if an insurer totals your car.
If the outstanding balance on the loan or lease is only a little more than the vehicle, you may want to take a chance. In that case, it’s a good idea to set aside some money in case you need it if an insurer totals your car.
In addition to depreciation, you may find gap insurance worthwhile for these reasons:
Does deficit insurance always pay?
pays as long as the total loss claim is not denied and you have current auto insurance coverage. However, if you haven’t made the car payments, that amount will be deducted, Gusner says. For example, if you are $400 late on a car payment, that amount will be deducted from your gap insurance payment.
when does deficit insurance not pay?
There are instances where gap coverage doesn’t pay. For example, if the claim for the totaled or stolen car is denied for any reason, or if your auto insurance coverage has expired, your gap insurance will not come into play. and, because it is limited to claims that declare your car a total loss, it would not cover the following, which are covered by other types of auto insurance:
will differential insurance pay your deductible?
The answer depends on your differential insurance policy. some policies pay the deductible and others do not. When you pay the primary insurance deductible amount, the deductible amount is not actually reimbursed to you. rather, the primary insurance deductible is taken from your total vehicle payment and covered as part of your unpaid loan balance, which is paid by gap insurance.
how to get car differential insurance?
You can buy auto gap insurance from the following:
can i get differential insurance without primary insurance?
You must have a standard auto insurance policy to get this coverage. For your gap insurance to be effective, you must have collision and comprehensive physical damage coverages on your vehicle, in addition to the minimum liability insurance requirements required by your state. This “full coverage” of liability and physical damage coverage is also typically required by the bank or lending institution where you obtained your auto loan.
Even if you get a separate gap policy, you still need your state’s minimum auto insurance coverage. that’s the insurance coverage you need to legally drive.
Can I buy differential insurance for a used vehicle?
yes, usually you can. State laws and insurance company guidelines vary, but there are gap policies that are available for used cars that are financed. It’s beneficial when the value of a vehicle, whether new or used, depreciates while you still owe money on the loan or lease.
is gap insurance acceptable as proof of insurance?
no department of motor vehicles accepts a gap policy as proof of insurance. it is not the correct type of insurance needed to show financial responsibility when registering or renewing your vehicle registration.
Showing proof of the coverage gap to law enforcement would not help if they ask for proof of insurance. it is an optional coverage that only helps you in a total loss situation, it does not provide the state-mandated liability coverage that the police want to verify you have on your vehicle.
can i get differential insurance on a non-car loan?
You can’t get gap coverage for lines of credit that can be used for purposes other than a vehicle. does not work with home loans, lines of credit, balloon payments, or other types of non-vehicle loans.
If you used money from your home equity line of credit (heloc) to purchase your vehicle, gap insurance would not cover this type of loan since the heloc should not be used specifically for a vehicle loan.
Gap coverage can typically only be purchased and used when you have received your money through a conventional auto loan or lease to obtain your vehicle.
Can I buy differential insurance if my loan is from an individual?
Gap policy providers will not offer coverage if your loan is through an individual.
When it comes to a bank or finance company, the gap insurance company knows the terms, sees the paperwork, etc. With a private party loan, it’s hard for the insurance company to be sure that the loan is just for the vehicle, the payments were made correctly, etc., all of which an insurer requires.
can you buy gap insurance at any time?
The terms and guidelines of gap insurance providers differ; Generally, gap insurance is available for new, used, and refinanced cars, trucks, and SUVs leased, purchased, or refinanced in the last 12 months. So if you know within a year of financing, leasing, or refinancing your vehicle that you owe more than your ACV gap, coverage could be beneficial to you.
gap insurance providers: where to buy gap insurance?