It happens more often than you might think. An automobile is stolen, damaged in a collision, or some other catastrophe affects it. The auto policy (whether it is the other person's liability insurance or your own comp / collision insurance) will only pay the market value of the vehicle if your vehicle is totaled. If that value is less than the amount you owe on that vehicle, you could be facing a gap!
Gaps of this type could be very small or they could amount to thousands of dollars. If you recently purchased a new vehicle and put less than about 20% down on the total, it will directly benefit you to consider this... Even if you put a large amount down, vehicles depreciate almost immediately the moment you drive them off the lot.
The first goal is to analyze the equity in your vehicle. Insurance companies follow cost guides to determine market value. One of the more accurate guides is the "Kelley Blue Book" value (no relation to us here at Kelly Insurance, by the way). You'll want to look at the private party retail value. This is, in essence, the approximate amount that you should be able to sell your car for if you listed it yourself. That's basically how much the car is worth to you and, inevitably the amount roughly that an insurance company will give you if it were totaled in an accident today. You can get this information for free at www.kbb.com.
Next, the other factor that you need is your current loan payoff amount. Some banks print the payoff amount on your bill while others might require you to call. This amount changes on a daily basis as it increase every day for interest earned and decreases whenever you post a payment to the balance.
Now that you have this information, take the vehicle's value and subtract the loan amount. If you have a negative number, this is your gap and sometimes you can buy insurance to cover the gap.
Please keep in mind, the type of gap coverage available on your insurance is generally only going to pay for the negative equity from this car. That means any negative equity from a previous loan (even a credit card) is likely going to be excluded on the insurance contract. For instance, if you roll $3,000 of negative equity that you had on your last car to the loan on the new one, $3,000 of the gap (from the math that you did a moment ago) is usually excluded. This exclusion exists to avoid an over-indemnification. Imagine it this way -- a customer could roll $3,000 of credit card debt onto a new car loan, buy the gap coverage, and let the car roll off of a cliff (along with his past credit card debt).
Now, we always recommend that you refer to the policy for the exact details. The coverage does vary a little from company to company. The point of this blog is to get you thinking about the gap coverage and what it can do for you... Please let your agent know if you have questions or are interested in adding the protection.