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Did you know that your new car lost about 10% of its value in the seconds you drove it out of the lot? Within three years, it may depreciate by half. If your vehicle is stolen or combined in an accident, the insurance company will base your compensation on its current value. Still, even if your insurance doesn’t cover everything, you are still obligated to repay the entire balance of your car loan. Gap insurance helps you deal with this cost. Bankrate breaks down the way that insurance for this type of new vehicle will help avoid massive out-of-pocket costs in Golden State.
What is Gap Insurance?
Gap coverage helps you pay the difference between what you owe on a car loan and your insurance company if your vehicle is stolen or suffers a complete loss. It fills the financial gap, but that’s not where this coverage gets its name. In reality, it represents “guaranteed asset protection.”
It is easiest to understand gap insurance by giving examples. Suppose you have purchased a new vehicle using a $25,000 car loan and have fully covered car insurance. Your vehicle will be stolen from your driveway and you will file a claim with your insurance provider. However, insurance companies are responsible for depreciation to claim payments and offer only $20,000. In this example, Gap Insurance will help you cover the remaining $5,000 you owe on a car loan.
Gap insurance is usually only available on new vehicles and models under three years. Without gap insurance, car insurance companies are not worried about the outstanding balance of car loans. If you are planning to fund most or all of your vehicle purchases, gap insurance can be an important safeguard. If you pay a substantial down payment, you may end upside down your loan, and you may have less risk of requiring this type of insurance.
How does gap insurance work in California?
California Gap Insurance is usually an option to purchase:
- You are the original loan or lease owner of a new vehicle purchase
- It has both collisions and comprehensive coverage
- Vehicles are under 2-3 years old
Gap coverage is generally confused with replacement coverage for newer cars, but they are different. Gap coverage is a way to protect yourself financially if your vehicle has an outstanding loan and experiences complete losses. On the other hand, a new car replacement will help the driver get a new version of the vehicle’s make and model that has been damaged after a complete loss. Gap Insurance is not about purchasing a new vehicle.
When will I use gap insurance?
From an insurance perspective, if the vehicle’s repair costs exceed the depreciation amount (also known as the actual cash value or ACV), a total loss will occur. This can occur if the vehicle:
- Destroyed by fallen trees
- Accident total
- It will not be stolen and recovered
- Inoperability due to a complete engine failure
If the vehicle is considered a total loss and insurance payments are not sufficient to cover your outstanding loan balance, gap insurance can help. However, remember that Gap Insurance is only a total loss. It is not useful for repairs or regular maintenance. For example, if you perform a stop sign and hit, but the car is slightly damaged, gap coverage will not apply. However, if you have collision insurance, it will help you pay for repairs in this case.
Gap Insurance vs. Other compensation options
Many types of car insurance can provide financial protection against the investments you make on your vehicle. However, each coverage type is relevant to a particular situation and it is difficult to keep them all straight. The table below shows how GAP insurance works in California, as well as comprehensive and collision coverage.
| Gap insurance | Comprehensive | collision | |
|---|---|---|---|
| What it covers | It will only cover your car if it is considered a total loss. You only pay the difference between the depreciation value and the remaining loan balance. | If the vehicle is damaged by something other than a collision, it will be damaged. It covers events such as fire, wind, fallen objects, vandalism, theft, and flooding. | Covers the car’s persistent damage by colliding with another vehicle or object, such as a sign, fence, or tree. |
| Who will offer it? | Many insurers offer it, but you might call it “loan/lease coverage.” Dealers also sell gap insurance in California. | Comprehensive coverage is provided by most, if not all, insurers. | Collision coverage is provided by most, if not all, insurers. |
Where to buy gap insurance in California
While you’re shopping, you may hear that California gap insurance is called loan/lease coverage. Although not all, major insurance companies write gap insurance. For example, GEICO, one of California’s largest auto insurance companies, is not.
If you are purchasing a new car from a dealer, gap insurance may be provided before you complete your purchase. However, most insurance professionals do not recommend purchasing gap insurance at the dealer. Not only is it usually costing more in advance than gap insurance from a regular insurance company, gap insurance from a car dealer is usually added to your car loan. This means paying interest.
Gap insurance companies in California
Fortunately, many car insurance companies are also gap insurance companies. If you’re wondering where to buy Gap Insurance, the following list of providers is a good place to get started.
- progressive: A national insurance company that offers many types of insurance. Gap coverage can be found under loan/lease coverage.
- All State: As the fourth-largest car insurance company in the US, it offers several add-on coverage options and numerous discounts as it could offset monthly premiums.
- Nationwide: It offers multiple usage-based programs in which customers’ driving habits are factored into rates.
- aaa: Local clubs offer different levels of coverage to their members, while California drivers can purchase gap insurance. You will need to have a membership in your local club.
- State Farm: A national insurance company that does not technically offer gap insurance, but has a payoff protector program for automobiles funded by State Farm Bank.
