If my vehicle is totaled will my insurer pay off the vehicle’s loan or lease?
How do insurance company representatives determine a vehicle’s ACV? They do so by estimating what the vehicle could be sold for on the open market, taking into consideration the vehicle’s age, condition, and depreciation. If you’re involved in a covered accident and your auto insurer declares the vehicle totaled, it will issue you a check equal to the amount it has determined as the ACV.
If your vehicle is declared totaled, and it’s a financed or leased vehicle, your lender or lessor will require you to repay the balance still owed on the loan or lease. Usually the insurer will mail the ACV check directly to the lender/lessor.
But what if the ACV amount is not enough to cover the balance due?
In that case, you will be responsible for paying the difference. For example, say you still owe $9,000 on your auto loan, but the insurer determines the ACV at only $6,500. In this example, $2,500 would still be owed by you. That’s where GAP insurance comes in handy.
GAP insurance is Guaranteed Auto Protection and it is designed specifically for this type of scenario. GAP insurance pays the balance owed lenders/lessors when the vehicle involved is declared totaled as a result of a covered accident. In the above example, GAP insurance, if you have it, would likely pay the $2,500 balance due on the loan/lease.
If you lease a vehicle, GAP insurance is usually built into your lease. So you pay for it as part of your monthly lease payment. If the leased vehicle is totaled, your insurer will pay the ACV, and the company issuing the leased vehicle’s GAP insurance would pay any difference.
If you finance your vehicle, the situation is different. You could purchase GAP insurance from your auto insurer. Remember though, this type of coverage is usually considered optional coverage so you aren’t required to purchase it. Alternatively, the company you use to finance your auto loan may offer GAP insurance. If so, you have the option of purchasing this type of insurance through the financing company.