Gap Insurance Doesn't Cover Negative Equity

By Penny GusnerLifestyle and

Question: Last year I bought a new Kia and was told if I purchased GAP insurance I wouldn't lose any money if I decided to trade up and the car had depreciated more than the loan value. Is this true? I finally read over my GAP insurance policy and it looks like it only covers the gap between the loan amount and the value of the vehicle in the event of an accident.

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Answer: You were misled.  Gap insurance does not cover your car's depreciation (or how much you're upside-down on your car loan) if you want to “trade up” for a more expensive vehicle.

As you've now read in your policy paperwork, gap insurance works to cover the “gap” between the actual cash value (ACV) of your vehicle and the loan amount when your primary insurance company has found the vehicle to be a total loss, or if the vehicle is stolen and not recovered.

For gap insurance to kick in, your primary car insurance company must pay out the car's actual cash value under collision or comprehensive, or if someone else was at fault, ACV would be paid out under the other driver's property damage liability coverage.

If you're upside-down on your car loan (owe more than your vehicle is worth), then gap insurance ensures that you don't end up still owing your lien holder if your financed vehicle is totaled or stolen.

For instance, say you still owe $17,500 on your Kia, but it's only worth $15,000. You total it out. After your collision deductible of $500 is taken out, your lien holder would receive $14,500 from your primary insurer -- and you'd be left owing $3,000 to your lender.

When you have gap insurance on the vehicle, at least $2,500 should be taken care of by your gap insurance -- some gap policies will also cover your $500 deductible and pay out the full $3,000; others will not.

However, if you want to trade in your vehicle, gap insurance can't help you with the negative equity you have in the Kia.

Another item to be aware of: Gap insurance won't transfer to your new vehicle. You'd need to buy a new gap policy for the new vehicle if you wanted the coverage.  Be forewarned, a new gap policy wouldn't cover any loan amount from the Kia that is carried over into the new car's loan, only the loan amount that is for the new vehicle would be covered by gap coverage.

If you paid for your gap insurance in full when buying the Kia, then when you trade the vehicle in for a new one, see if you should receive a refund for the unused portion of the policy.  If you pay for gap coverage monthly, then you used the coverage each month as you paid for it, and thus would not be eligible for a refund.

Buying gap insurance from a dealership will usually be more expensive than buying it from an insurance company.

We work with companies that offer loan/lease coverage, such as Travelers and Progressive, when you buy your primary car insurance policy with them that includes collision and comprehensive coverage.  Loan/lease coverage is similar to gap insurance, but may have conditions, such as its payment won't exceed 25 percent of the ACV of the vehicle at the time of the loss, it varies by insurer.

As with any type of auto-related insurance coverage, you need to comparison shop to find the best price for your gap insurance.

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