Overview
Gap insurance covers the gap between the car’s value and what you owe on your loan or lease. If your car is totaled in a covered accident, your collision insurance will pay up to the car’s actual cash value. But if you’re financing a new car or leasing one, you might owe more on the loan or lease than the cash value of the car.
Depending on how much you still owe on your lease or loan, you might owe your lender thousands of dollars if your car is totaled. If you have gap insurance, you don’t have to worry about the financial strain of a large, unexpected bill.
If your car is totaled, you’ll probably want to buy a new one. But that can be hard to do when you’re still making payments on the totaled car. Gap insurance can pay off the rest of the loan so that you won’t personally owe the lender.
Most brand-new cars depreciate 20% in the first year. That depreciation may be greater if you rack up more miles than average or if your car has some damage. No matter how much your car depreciates, gap insurance ensures you’ll be able to pay your lease or loan.
How does gap insurance work?
Let’s say you just bought a brand-new car for $30,000, and it’s totaled in an accident when you still owe $20,000 on your car loan.
When you file a claim, your collision coverage will pay up to your car’s actual cash value at the time of the crash. New cars depreciate fast, so say your car’s value is $18,000.
The insurance company would pay your lender $18,000. But since you still owe $20,000 on your auto loan, you would need to come up with the remaining $2,000 on your own. However, if you have gap insurance, it would cover that $2,000.
How much does gap insurance cost?
That depends on where you get it. If you buy gap coverage at a dealership, you might be charged a flat rate of a few hundred dollars. However, if you add gap coverage to your existing car insurance, you might pay as little as $5 per month.
Uninsured or underinsured motorist coverage
Uninsured or underinsured motorist coverage protects you if you’re in an accident with a driver who has no insurance or insufficient coverage. It allows you to file a claim with your own insurer to cover injuries or property damage.
This coverage steps in if you’re hit by a driver with no insurance or not enough insurance. Uninsured or underinsured motorist coverage ensures you’re not left footing the bill for someone else’s mistake.
Uninsured motorist coverage protects you if you’re hit by a driver who has no auto insurance. Underinsured motorist coverage, which is usually offered alongside uninsured motorist coverage, protects you if you’re hit by a driver who doesn’t have enough coverage to pay for the damages or injuries they caused.
Both coverages are mandatory in many states and highly recommended for all drivers. If you’re a victim of a hit-and-run accident, you can file a claim against your uninsured motorist coverage.
Do I need uninsured motorist coverage?
Not all states mandate uninsured motorist coverage, also known as UM coverage. However, even if UM coverage isn’t required in your state, you take a serious risk if you drive without it. Nearly 13% of drivers countrywide don’t have auto insurance. In some states, the number of uninsured drivers is over 20%.
Without uninsured motorist coverage, if you’re injured or your vehicle is damaged in an accident with an uninsured or underinsured driver, you could end up paying for medical bills or vehicle repairs out of your own pocket.
In which states is uninsured/underinsured motorist coverage required?
While not all states mandate uninsured and underinsured motorist coverage (UM/UIM), around half require at least one of these coverages and some may only require you to purchase coverage for bodily injury. States that don’t require uninsured and underinsured motorist coverage may still offer the option to purchase it if it’s available.
For example, Illinois requires both uninsured and underinsured motorist coverage. In New Hampshire, car insurance is one of several ways to demonstrate financial responsibility, but if it’s purchased, the state requires both uninsured and underinsured motorist coverage to be included on every policy. Other states, like Massachusetts and South Carolina, only require uninsured motorist coverage.
Types of uninsured and underinsured motorist coverage
Like liability insurance, uninsured and underinsured motorist coverage breaks down into two coverage types: bodily injury and property damage.
Uninsured/underinsured motorist bodily injury coverage (UMBI/UIMBI)
Uninsured/underinsured motorist bodily injury is designed to cover you and the people in your car for medical bills, lost wages and pain and suffering if you’re in an accident caused by someone who doesn’t have insurance or enough insurance.
Medical payments (Med Pay) coverage or personal injury protection (PIP) may not be enough to keep drivers from needing UMBI or UIMBI. Keep in mind that if you’re injured by an uninsured driver, UMBI or UIMBI may offer higher limits than either of those.
Uninsured/underinsured motorist property damage coverage (UMPD/UIMPD)
Uninsured motorist property damage (UMPD) and underinsured motorist property damage (UIMPD) are designed to protect your car if someone hits you and doesn’t have insurance or enough insurance.
Say another driver causes a 3-car accident. The damage is significant, and the responsible driver is uninsured or has low limits. These coverages could help cover the remaining repairs, up to the policy limits. They could also help to cover a collision deductible, rental car costs or other out-of-pocket expenses.
In some states, these coverages are required and automatically included for each vehicle on the policy. In other states where coverages are available but not required, if you want it for all vehicles on your policy, you’ll need to add it separately for each.
How stacking works?
If you have more than one car on your policy you may be able to “stack” your uninsured and underinsured bodily injury coverage. Stacking is not allowed in every state.
When uninsured and underinsured motorists bodily injury coverage is stacked, your selected limit is multiplied by the number of cars.
Say you’re a Pennsylvania driver with UMBI limits of $50,000/$100,000. If you add a second car to your policy, stacking will increase your limits to $100,000 per person, $200,000 per accident.
FAQ
Gap insurance covers the difference between your car’s actual cash value and the remaining loan or lease balance if your vehicle is totaled or stolen. Without it, you may have to pay the remaining amount out of pocket.
It’s useful for those who finance or lease a vehicle, especially if the loan balance is higher than the car’s depreciated value. If you made a small down payment or have a long-term loan, Gap insurance can prevent financial loss.
No, Gap insurance only applies if your car is declared a total loss due to an accident or theft. It does not cover repairs, maintenance, or other damages.
Full coverage includes liability, collision, and comprehensive insurance, which cover damages and repairs. Gap insurance strictly covers the remaining loan or lease balance after a total loss payout.
Yes, you can usually cancel Gap insurance if your loan balance falls below the car’s value. Some lenders may allow a refund for unused coverage if you pay off your loan early.
