Gap insurance is meant to be used in conjunction with collision coverage or comprehensive coverage. If you have a covered claim, your collision coverage or comprehensive coverage would help pay for your totaled or stolen vehicle up to its depreciated value.
Gap insurance coverage may apply if you’re underwater on your auto loan (meaning, you owe more than the car is worth) when your vehicle is stolen or totaled. “Totaled” means that repair costs exceed the value of the vehicle. Whether a vehicle is declared totaled depends on state laws and your insurer’s discretion.
Here’s an example of how gap insurance may work: Say you bought a car for $25,000. You still owe $20,000 on your auto loan when the car is totaled in a covered collision. Your collision coverage would pay your lender up to the totaled car’s depreciated value — say it’s worth $11,000. If you don’t have gap insurance, you would have to pay $9,000 out of your own pocket to settle your auto loan on the totaled car. If you have gap insurance, your insurer would help pay the $9,000 difference.