When it comes to protecting your vehicle, you may have heard of the term “total loss protection” or “gap insurance.” But what exactly does it mean and do you need it? In this article, we will discuss the basics of total loss protection and how it can benefit you in the event of a total loss of your vehicle.
What is Total Loss Protection?
Total loss protection, also known as gap insurance, is a type of coverage that fills the gap between the actual cash value (ACV) of a vehicle and the amount still owed on the vehicle’s loan or lease. In the event of a total loss, such as a car accident or theft, the insurance company will only pay the ACV of the vehicle. However, if the vehicle is financed, the amount still owed on the loan may be higher than the ACV. Total loss protection covers the difference between the ACV and the outstanding loan amount, also known as the “gap.”
Why Do You Need Total Loss Protection?
There are a few reasons why you may want to consider total loss protection for your vehicle. First, if you have recently financed or leased a vehicle, you may owe more on the vehicle than it is currently worth. This is known as being “upside down” on the loan. In the event of a total loss, you would be responsible for paying the difference between the ACV and the outstanding loan amount.
Second, vehicles depreciate in value over time. As you make payments on your loan or lease, the value of the vehicle decreases, making it more likely that you will be upside down on the loan. Total loss protection can provide peace of mind in case something happens to your vehicle before it is fully paid off.
Third, if you are in an accident or your vehicle is stolen and deemed a total loss, you may be left without a vehicle and still owing money on the loan or lease. Total loss protection can help cover the outstanding loan amount and provide you with the funds to purchase a new vehicle.
How Does Total Loss Protection Work?
Total loss protection can be added to your existing auto insurance policy or purchased as a standalone policy. The coverage is typically a percentage of the outstanding loan or lease amount, up to a certain limit. The coverage amount can vary by provider and policy, so it is important to read the fine print and understand what is covered.
In the event of a total loss, you will need to file a claim with your insurance company and provide documentation of the outstanding loan or lease amount. The insurance company will then determine the ACV of the vehicle and pay out the difference between the ACV and the outstanding loan or lease amount.
It’s important to note that total loss protection is not a substitute for liability, collision or comprehensive coverage, which you are required to have by law. It is an additional coverage that can be added to your existing policy.
When Should You Consider Total Loss Protection?
If you have recently financed or leased a vehicle, you should consider total loss protection. It can provide peace of mind in case something happens to your vehicle before it is fully paid off. Additionally, if you are worried about being upside down on your loan or lease in the future, total loss protection can help protect you from financial loss in case of a total loss.
It’s also a good idea to consider total loss protection if you are purchasing a new vehicle, as vehicles depreciate in value quickly, and you may be upside down on the loan in a short time.
