How Does Gap Insurance Work After a Car is Stolen?

Having your car stolen can be an extremely stressful and frustrating experience. Not only do you lose your primary mode of transportation, but you may still owe money on an auto loan for a car you no longer possess This situation often leaves drivers wondering how gap insurance works after a car is stolen

Gap insurance is designed to pay the difference between what your car insurance pays if your vehicle is totaled or stolen and what you still owe on your auto loan. It protects you from continuing to make payments on a vehicle you no longer have.

This article will explain everything you need to know about using gap insurance after your car is stolen

What is Gap Insurance?

Gap insurance, also sometimes called guaranteed auto protection or GAP insurance, is an optional add-on coverage you can purchase when financing or leasing a new or used car.

It steps in to cover the “gap” between what your standard auto insurance policy pays if your vehicle is totaled or stolen and what you still owe on your car loan or lease.

For example, let’s say you purchase a new car for $20,000 and finance it with an auto loan over 5 years. After two years of payments, you still owe $14,000 on the loan, but your car is now only worth $10,000 due to depreciation.

If it gets stolen at this point and your insurance company declares it a total loss, they will only pay you the current cash value of $10,000. Without gap insurance, you’d be stuck owing the lender $4,000 for a car you no longer have.

Gap coverage pays this $4,000 difference so you don’t have to. It protects you from taking a big financial loss.

How Gap Insurance Works After a Car Theft

So how does gap insurance help you specifically in the event your car is stolen? Here are the key steps:

• Report the theft immediately – As soon as you notice your car is missing, report it to the police to get an incident report. Alert your insurance company and file a claim as well.

• Insurer investigates and declares a total loss – Your insurer will investigate and after a set period of time has passed, likely deem it a total loss if the vehicle isn’t recovered.

• You receive the ACV payout – Your insurance company will pay you the actual cash value of your car at the time it was stolen. But this isn’t enough to pay off your remaining loan balance.

• Gap insurance pays the difference – This is where gap insurance comes in. It will pay the difference between your ACV payout and what you still owe on your loan, up to the policy limits.

• Loan is paid off – Your lender is made whole and your loan is considered paid. You don’t have to continue making payments for a stolen car!

So in essence, gap insurance protects you from financial loss if your car is stolen before you finish paying off your auto loan. For many drivers, it’s a valuable protection.

Do I Need Gap Insurance if My Car is Stolen?

Whether you need gap insurance after a theft depends on a few factors:

• How much you still owe on your loan – The more left on your loan, the bigger the potential gap.

• Your down payment amount – Smaller down payments increase the gap risk.

• Your car’s depreciation rate – Quickly depreciating cars have a higher gap risk.

• Your state’s sales tax rules – States with higher tax rates widen the gap.

• Length of your loan term – Longer loans (5-6 years) increase the gap.

Essentially, if you owe more than your car is worth and have a long loan payoff horizon, gap insurance can be extremely valuable protection in case it’s stolen.

On the other hand, if you made a large down payment and are nearing the end of your loan, you may not need gap coverage after a theft.

How Much Does Gap Insurance Cost?

Gap insurance premiums vary by your car’s make, model, value, lender, and loan details, but on average cost between $300-$700 total for 3 years of coverage. That breaks down to about $10-$20 extra per month rolled into your loan payment.

Compared to the financial protection it provides by eliminating several thousand dollars of leftover loan debt, gap insurance is relatively inexpensive for most drivers.

Some lenders like credit unions may offer free gap insurance as an incentive. It pays to shop around.

When to Buy Gap Coverage

The best time to buy a gap insurance policy is when you first purchase or lease your vehicle. This ensures you’ll be covered in case it’s stolen shortly after driving it off the lot.

Most auto lenders and dealers will offer you the option to add gap coverage to your financing package right at the dealership. This simplifies the process.

You can also contact your auto insurance company and add gap insurance to your existing policy, often for a small monthly fee.

Finally, if you already own your vehicle outright, some insurers let you retroactively purchase gap coverage. But this is less common.

How Long Gap Insurance Lasts

A gap policy typically lasts for the entire term of your auto loan or lease – usually 3-6 years. Some insurers may cap gap coverage at 2-3 years, so check your specific policy.

The coverage expires once your loan balance reaches the actual cash value of your car. At that point, if your vehicle was totaled or stolen, your standard auto policy would pay enough to settle the loan.

Be sure to cancel your gap policy once your loan is paid off to avoid overpaying premiums.

How Much Gap Coverage Do I Need?

When purchasing a gap policy, you’ll need to select a maximum benefit amount. This is the most the policy would pay if your car is totaled or stolen.

You’ll want your gap maximum limit to equal the total amount you financed for the car including the purchase price, sales tax, registration fees, extended warranties, etc. It should cover your entire loan balance.

Typically, you can choose limits ranging from $5,000 up to $50,000 or higher. Pick an amount sufficient to pay off your remaining loan in a worst-case scenario.

What Gap Insurance Doesn’t Cover

It’s also important to understand what gap coverage does not pay for. Typical exclusions include:

• Deductibles or other costs paid to your primary insurer
• Late fees or payment penalties
• Extended warranties
• Add-ons like fancy stereo equipment
• Modifications or custom upgrades
• Contents inside the vehicle
• Injuries suffered during the theft

Gap insurance solely covers the financial difference between your ACV payout and remaining loan principal. Review exclusions carefully.

How to File a Gap Claim After a Car Theft

Filing a gap insurance claim after your car is stolen involves a few key steps:

• Notify police and your primary auto insurer immediately when you discover the theft.
• Submit any forms your insurer requires and cooperate fully with the investigation.
• Allow reasonable time for your standard insurer to declare it a total loss after investigating.
• Contact your gap insurer and provide necessary documentation like police reports and your primary claim paperwork.
• Submit any other requested evidence like loan/lease documents and vehicle valuations.
• Your gap insurer will review and process your claim, verifying details with your lender.
• Once approved, the gap insurer will pay your lender directly on your behalf.
• Your lender will contact you that the loan is paid off and you’re no longer responsible for payments!

The entire claims process usually takes 2-8 weeks from start to finish. Stay in touch with your insurers throughout.

Mistakes to Avoid With Gap Insurance Claims

To ensure your gap claim after a theft goes smoothly, avoid these common mistakes:

• Failing to promptly report the theft to police and your primary auto insurance company.
• Neglecting to submit required forms and evidence to your insurers in a timely manner.
• Omitting important details or making misstatements on your paperwork.
• Accepting an early settlement from your standard insurer before confirming details with the gap provider.
• Failing to follow up on the status of your claim with both insurance companies.
• Stopping your loan or lease payments before the claim is finalized.

Not reporting your stolen car and providing documentation promptly can delay your claim significantly or risk denial.

Alternatives to Gap Insurance

Some drivers choose to forego gap coverage and self-insure their risk instead. Here are a few alternatives to consider:

• Increase your down payment – Putting 20% down or more reduces your risk of ending up underwater on your loan if your car is stolen.

• Take a shorter loan term – 3 year loans lower your depreciation gap versus 5-6 year terms.

• Get an inherently stable vehicle – Trucks, SUVs, and certain brands hold value better than average.

• Open a special savings account – Earmark funds to cover a potential gap amount in case you need it.

• Pay extra principal payments – Paying your loan down faster helps minimize gap risk over time.

Carefully weighing alternatives