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February 24, 2021

How does GAP Insurance Work after a Car is Totaled?

We all know how it goes. When you buy a beautiful new car for a significant amount of money, you are happy to drive it off the lot. But as you do, you are fully aware that it just lost a good percentage of its market value. Within one day, your care will likely lose roughly 11% of its value. Further down the line, cars lose 20% of their value within a year.

When we finance our car purchase, we may soon find that the loan you have taken is worth more than the entire value of your vehicle. This is a widespread problem nowadays. According to a study, 86% of new car buyers do so with a loan’s help. The average length of these loans is six years and amounts to over $30,000 on average.

What GAP Insurance Covers

With costs like this, you soon are ‘underwater’ regarding the balance between your car’s value and the amount owed on your loan. This condition can have some profound implications, particularly if an accident has totaled your car. Your insurance will typically cover the current value of the vehicle.

If you check your insurance policy, you will likely see that the company guarantees to pay the actual cash value (ACV) of your car. The amount should be equal to the vehicle’s objective value the moment before it sustained devaluing damage.

That amount is undoubtedly helpful and is better than nothing. But it will not be as helpful as you would like when you need to replace your car. Indeed, the steeper the depreciation, the worse your problem becomes.

This is where GAP insurance comes in. Insurance companies call it GAP insurance both because it is an acronym for ‘Guaranteed Auto Protection’ and since it covers the gap between your payments and the value of the vehicle in question.

The best thing about having GAP insurance is that you will not have to make the payments on your totaled car. Imagine, having to pay thousands of Dollars for a car that you can no longer drive! Once you file, the insurance company should take over payments for you.

GAP insurance kicks in if your car has become completely unusable or when it will cost more to repair a car than it is worth. Quite a few states use the Total Loss Formula. According to this definition, if the cost of repairing and the scrap value of the vehicle’s materials exceed the pre-accident value of the car.

In some states, a car is totaled when repairs cost significantly less than its full value. For example, in Iowa, the insurance company will declare a car totaled if the cost of repairs is 50% of the total ACV. Insurance companies call this situation a ‘total loss’ or, more colloquially, people may say the car is totaled.  

What GAP Insurance Doesn’t Cover

Keep in mind that while GAP insurance is beneficial, like all forms of insurance, it does not cover every eventuality. Insurance companies do not design the policy as a means to help you to buy a new car. It is only there to compensate you for the current value of the vehicle. When an individual owns their vehicle outright, this is usually enough to fund a replacement. However, with considerable loan payments over the driver’s head, the amount refunded is often not enough. At best, it can cushion your out-of-pocket expenses on a new vehicle.

To start with, most GAP insurance does not cover the deductible on your vehicle. That is a severe drawback to GAP insurance. The insurance company will take the deductible off the ACV of your car. Therefore, even after your recoup on both your standard car insurance and its GAP equivalent, you will not receive enough to cover the entire value of your car. Therefore, if you can, try to find GAP insurance guaranteeing full coverage of the deductible. It is the only way to ensure total compensation for the value of your vehicle.

It does not cover your inability to make payments, no matter what the reason. It also does not cover damages to the car if it is still drivable. GAP coverage is also not valid for when a vehicle has been stolen or repossessed.

Therefore, GAP insurance is really only useful when you are well underwater in terms of payments in comparison to the value of your vehicle. Once the gap has been narrowed significantly, you may consider cancelling it,

What Happens to Your Totaled Car?

In most states, you must register a totaled car as a ‘salvage title.’ When your vehicle is in this condition, it cannot be registered for plates or driven legally (this is usually not an option anyway).

In other states, you are not allowed to keep a totaled vehicle. In those cases, the insurance company will usually auction the car off and keeps the proceeds. When state laws allow the driver to retain ownership, it can be auctioned off to salvager, and the amount recouped will be deducted from the settlement you receive.

Keeping and fixing the car is usually not a good option. Many insurance companies are hesitant to insure a previously totaled car, as it may be challenging to assess its value and roadworthiness.

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