When you’re buying a new car, the car salesmen may pitch gap insurance to you and suggest you tack it onto your loan. While this may be faster than researching and choosing your own gap insurance provider, it may not be the best choice for you and your bank account. To find the best option for gap coverage, you need to know what you need and why you need it. California gap insurance may not be for everyone, but it can be a lifesaver for those who need it.
What is gap insurance?
Gap coverage covers the difference between your vehicle’s payout amount received from your auto insurer and the remaining balance owed to your lender should your car be totaled or stolen. (Sidenote: contrary to what you might think, ‘gap’ is an acronym. It stands for ‘guaranteed asset protection.’)
To understand gap insurance, think of your vehicle as having two values: its depreciated value and its loan amount. Of course, insurers have a more technical term for depreciated value: they say actual cash value (aka ACV). ACV is the amount a vehicle might sell for after age and normal, everyday use. It’s the amount your auto insurer will pay if your vehicle is totaled from a covered claim. This amount is determined by your insurer at the time of loss and depreciates over time.
Your vehicle’s loan value is the amount you owe to the lender if you financed your vehicle. As you might expect, your vehicle’s loan value only matters to you and your lender. Without gap coverage, your insurance company is not concerned about what you still owe on your loan.
So gap coverage essentially closes the gap between your vehicle’s actual cash value determined by your insurer and the loan amount owed to your lender. For example, say your new car is stolen. You owe $25,000 on your auto loan, but you only receive $20,000 from your insurance company because of its ACV. In this example, gap coverage would pay the remaining $5,000 owed on the loan, so the loan amount is completely paid off.
All in all, gap coverage prevents you from making payments on something that’s no longer in your life. It can also prevent you from having to make two car payments should you replace your stolen or totaled car.
How does gap insurance work in California?
Gap insurance is generally an option to purchase if:
- You are the original loan or leaseholder on a new vehicle purchase
- You have both collision and comprehensive coverage
- The vehicle is less than 2-3 years old
Most people have a misconception about gap coverage and think they can purchase it at any time. Contrary to public opinion, you can’t get gap coverage on any vehicle you finance.
Gap coverage should not be confused with ‘new car replacement.’ Gap coverage only covers the difference between your ACV insurance payout and the amount you still owe on a loan. It doesn’t have anything to do with purchasing a new vehicle.
When do you use gap insurance?
Gap coverage activates when your vehicle is deemed a total loss by your insurance company.
Therefore, it would activate in such situations as:
- Destroyed by fallen tree
- Totaled in an accident
- Stolen and never recovered
Gap insurance does not apply if you are in a fender bender or the vehicle is dented by hail. To receive gap coverage, driving your car can no longer be an option.
Gap insurance vs other coverage options
As you likely know, there are many types of coverage options you can purchase to protect your vehicle. However, your coverages work a little differently to help cover costs associated with your vehicle, depending on the situation.
|What it covers||Only covers your car if it is deemed a total loss. Only pays the difference between ACV and your remaining loan amount.||Pays for damages if your car is damaged by something other than a collision. Covers events such as fire, wind, falling objects, vandalism or flood waters.||Covers damage sustained to your car from colliding with another vehicle or object, such as a sign, fence or tree.|
|Who offers it||Many insurance companies offer it, but often call it ‘loan/lease coverage.’ Dealerships also sell gap insurance.||Comprehensive coverage is offered by most, if not all, insurance companies.||Collision coverage is offered by most, if not all, insurance companies.|
Where to buy gap insurance in California?
Gap coverage is a common coverage offered by car insurance companies, so you shouldn’t have any issue finding it. While you’re shopping for it, remember that it may be called loan/lease coverage.
Dealerships also often sell it, and while it may be easier to simply go with them, you might save money by working through an insurance provider. Dealerships may tack on gap coverage to the loan itself, but the problem with this is that you’ll end up paying interest on it. Some may allow you to prepay the gap coverage as a separate transaction.
Gap insurance companies in California
Buying gap insurance is easy. Look around, and you’ll find auto insurance companies offering it. Some providers include:
- Progressive: National insurance company that offers many types of insurance. Gap coverage can be found under ‘loan/lease’ coverage.
- Liberty Mutual: You can purchase additional endorsements through Liberty Mutual, including gap coverage. The company also has some pretty decent discounts.
- Allstate: As the fourth largest auto insurer in the U.S., it offers eight additional add-on coverages and 10 discounts every driver can take advantage of.
- Nationwide: The average annual cost for a full policy with Nationwide is only $1,485 for full coverage and only $501 for minimum coverage.
- Travelers: Ranks highly in many customer satisfaction surveys and offers a fair amount of discounts you can use to offset your monthly premium.
Frequently asked questions
How much is gap insurance?
The price for gap insurance will vary depending on where you purchase the coverage. Generally, it is more expensive if it’s purchased through a dealership than through an auto insurer, but it helps to get multiple quotes from different companies.
Is gap insurance required in California?
California gap insurance is not required by California state law. However, lenders might require it as a condition of the loan or lease.
Do I need to purchase collision and comprehensive before I can purchase gap insurance?
In most cases, yes, you need to have comprehensive and collision before you can purchase gap coverage.
How do you cancel gap insurance?
If you have it on your auto policy, you might be able to cancel your gap coverage online. However, you may need to speak directly with an insurance agent to cancel this coverage in some cases.