If you have purchased a new car or bought from an auto dealer, you may have been offered gap insurance. This is a special type of coverage that helps cover the difference between the worth of a vehicle and the amount that you still owe on it. It helps to ensure that if your car is significantly damaged or totaled, you can cover the funds remaining on your loan. Like some states, gap insurance in Colorado is available for certain situations. Here, Bankrate breaks down how it works and what gap insurance in Colorado can offer you.

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What is gap insurance?

Gap insurance is designed to provide financial compensation to a car owner who has experienced the total loss of a new financed vehicle. The loss could have resulted from an accident, natural disaster, fire or theft.

In the event your car is totaled in a covered incident, a standard auto policy typically pays out the vehicle’s actual cash value (ACV). The ACV takes into account depreciation and is therefore unlikely to align with the amount you paid for the vehicle. So, if the standard insurance payout isn’t enough to fully cover what you still owe on your car loan, having gap insurance in Colorado may help make up the difference.

How does gap insurance work in Colorado?

Gap coverage may not be at the top of your mind when purchasing a car and obtaining insurance. However, gap coverage may be an inexpensive way to avoid paying your remaining loan balance out of pocket in the event your vehicle is damaged beyond repair. It is important to understand how gap coverage works before deciding if it might be beneficial for you.

Unlike the standard components of a policy, which may include liability, comprehensive and collision coverage, gap insurance in Colorado is designed to address a very narrow aspect of risk. Gap only covers the difference between an insurance payout after a covered claim and your outstanding loan in the event of a total loss.

Due to the nature of gap insurance, it is not typically available when you are buying a used car that is older than one model year. Gap coverage is not the same as new car replacement coverage, either. The only time gap insurance will help you is if your vehicle is totaled and you owe money beyond what your collision or comprehensive insurance will cover. In that situation, the gap insurance payout will generally go directly to the holder of your auto loan.

When do you use gap insurance?

Gap insurance kicks in when you owe money on a vehicle that is totaled, and the amount you owe exceeds what you receive from a comprehensive or collision coverage payout. While this typically arises in conjunction with a serious accident, the damage can be caused by other perils covered by the policy — like theft, for instance.

Let’s say your car is destroyed in an accident, and you are paid an ACV of $10,000 by your insurer. You could still be in financial trouble if you owe $15,000 on your loan. Gap coverage, in this instance, could help with the $5,000 difference.

Gap insurance vs other coverages

A full coverage car insurance policy generally has three common components: liability, collision and comprehensive coverage. These types of insurance can help protect you financially from third-party claims, injuries you or your passengers incur and damage to your vehicle.

Gap insurance can work with collision and comprehensive coverage if your car is totaled and you still owe money on it. However, the similarities end there.

Gap insurance Comprehensive Collision
What it covers Generally, the amount of the outstanding loan on the vehicle minus the insurance payout after a total loss. The cost of repairing damage to a vehicle from non-accident policy perils including fire, theft and natural disasters. The cost of repairing damage to a vehicle caused by a collision with another vehicle or stationary object.
Who offers it In Colorado, you may be able to buy gap insurance from a car insurance company, lender or dealership. Comprehensive coverage is offered by most auto insurers and may be required by your lender or lessor. Collision coverage is offered by most auto insurers and may be required by your lender or lessor.

Where to buy gap insurance in Colorado

You can purchase gap insurance in Colorado from several insurance companies. Although not every carrier offers gap insurance, it is a relatively common product sold by many providers.

Gap coverage might also be available directly from the dealership or the lender who financed the vehicle; however, it can potentially be more expensive than buying it through an insurance company. Often, when the coverage is purchased from a dealer or lender, it is packaged as part of the loan — meaning you may end up paying interest on it.

Gap insurance companies in Colorado

Insurance carriers and lenders that provide gap coverage in Colorado include:

  • Allstate – Allstate offers gap insurance that protects both new and used vehicles and covers loan amounts up to $50,000. The coverage also includes payment of deductibles below $1,000.
  • Liberty Mutual – Liberty Mutual requires gap insurance to be purchased when the vehicle is purchased. To qualify, the vehicle must be new.
  • Nationwide – Nationwide offers gap insurance but requires the insured to pay the deductible.
  • Credit Union of Colorado – If your vehicle is stolen or totaled, this credit union’s gap coverage pays the difference between the insurance company’s payout and the outstanding loan balance.

Frequently asked questions

    • Gap insurance may be purchased from three sources — a car insurance company, a dealership or a lender. In most instances, gap coverage is more expensive when it is purchased from a dealer or lender. Experts recommend comparing quotes to ensure you are getting the best rate.
    • Gap insurance is not required in Colorado. However, dealers or lenders may have requirements for gap coverage as a condition of financing. Even if it’s not required, experts recommend considering gap insurance when purchasing a new car. Before deciding, it’s often best to speak with an insurance professional to see if gap coverage is right for you.
    • In most cases, a gap coverage policy can be canceled at your discretion. Contact your gap insurance provider for specific details regarding cancellation. Before canceling, you may want to make sure your loan balance is well below your vehicle’s actual cash value to avoid paying out of pocket for the remaining loan should your car be totaled.
    • The average cost of full coverage car insurance in Colorado is $2,121 per year. However, you may be able to find some providers that offer cheaper protection plans. Bankrate has found that the cheapest full coverage car insurance companies in Colorado include American National and Geico — though there are a number of factors that go into determining how much you will pay for your insurance plan based on information like your driving history and vehicle make and model.