Buy Lease or Loan Gap Coverage

The dramatic plummet of your car's value as soon as you drive it off the dealer's lot can put surprising and undue strain on your wallet if your car is totaled. The amount your insurance company calculates as your car's actual cash value can be stacks of bills away from what you still owe on your car lease or loan. Since you're responsible for paying the remainder of your lease or loan even when your car is totaled, you might have to come up with hundreds — maybe even thousands — in cash.

Unless you have gap insurance.

Gap insurance pays the difference between the amount your insurer pays for your totaled car and the amount you owe on your lease or loan.

Many car lease contracts include gap insurance and require you be in total compliance with the lease in order for the gap coverage to pay out. Ford's Red Carpet lease, for example, requires you to continue making your regular monthly payments until Ford receives the gap insurance payment. The cost of the gap insurance when you lease is built into the agreement, so you need not make a special trip to your auto insurer to request it.

The Loan Gap

If you decide to finance your vehicle through a bank, you'll likely not have a contract that provides you with automatic gap insurance. Many auto insurers sell gap insurance but, curiously, they don't advertise the fact. And some of the biggies don't sell it at all. GEICO and State Farm Mutual Automobile Insurance Co., for example, don't sell it. Why? Could be that policyholders aren't beating down the doors for gap coverage. Could be that not everyone who owns a car needs gap insurance. Could be that the leasing companies have filled the void in their own contracts.

"We don't see a big need for it, but we're going to offer it because we don't want to be ruled out [by policyholders for not offering the coverage]," says Debbie Harris, senior underwriter at Auto-Owners Insurance Co.

Auto-Owners has rolled out its loan gap coverage in Indiana, Iowa, Michigan, and Ohio and expects it to be available in the other 23 states in which it sells insurance by the end of the year. The coverage is available to only those who have bought brand-new, never-before-titled cars and who have purchased comprehensive and collision insurance with Auto-Owners. Harris says that the policyholder must buy the loan gap insurance when he or she initially purchases insurance. "You can't put the coverage on at a later date," she warns.

The cost of the loan gap coverage from Auto-Owners is 5 percent of the combined cost of your collision and comprehensive insurance.

Auto-Owners also provides a special "new for old" coverage. If, within the first 90 days of purchase, you total your new vehicle, the company will spring for a new car, regardless of how much it costs to replace. Harris says that "new for old" coverage is built into the standard auto insurance policy.

Other insurers are selling gap insurance, too. Progressive Insurance Co., for example, sells "loan/lease payoff coverage" — essentially gap insurance.

If you decide to keep your totaled car, Progressive will deduct the car's salvage value from its gap insurance payout, and will not pay for any finance or late charges, extended-warranty charges, or credit insurance charges or refunds. In addition, Progressive's gap payout will not exceed 25 percent of the car's actual cash value, according to a Progressive auto policy from Connecticut. Finally, you can't buy gap insurance from Progressive unless you also have comprehensive and collision insurance.

"Our gap coverage is the most awesome coverage you've ever seen in your life," quips Edward Glinski, a personal lines staff specialist at State Auto Insurance Co., based in Columbus, Ohio. State Auto's lease/loan gap coverage is available in most of the 28 states in which it sells insurance, and will cost you 2 percent of your combined comprehensive and collision coverage premiums.

State Auto requires you to have both comprehensive and collision insurance with the company to qualify for gap insurance. You can buy it only if your car has never been titled, and payouts are capped at $5,000. In addition, State Auto, like Progressive, won't pay for late fees or finance charges, wear-and-tear and excess-mile charges, or extended warranty or credit insurance charges that are part of your lease or loan.

Glinski acknowledges that some insurance agents won't tell you about the gap coverage because they might not realize you need it. If you find that you need gap insurance ask your local independent agent for a list of companies that sell it. Or, if you're a member, you might be able to obtain gap insurance from your credit union.

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