Gap Insurance Payout is Determined by ACV

In Massachusetts, comprehensive and collision car insurance policies (Full Coverage) will pay for the replacement of your vehicle if it’s a covered total loss – up to the limits of your policy based on the car’s actual cash value.  This value is calculated as the cost of the car when it was new, minus depreciation for age, mileage, physical condition and other factors.

After just a year, the ACV of your car can be thousands less than what you paid for it, which can leave you with an expensive loan or lease balance. This is why you never want to purchase a newer vehicle without putting at least 20% down. Refer to our section on how to buy a car the right way.

Let’s say your car cost $25,000 when new, and you currently owe $20,000. If the car is totaled, the ACV of the vehicle may be only $18,000. You have a deductible of $500, so the car accident settlement is $17,500. Your gap insurance coverage may pay the remaining $2,500 on the loan instead of having to come up with the money out of your own pocket.

What Does Gap Insurance Cover?

Gap insurance only covers damage to your vehicle, not other property or bodily injuries resulting from an accident. Here are a few common questions related to gap insurance coverage.

  • Does Gap Insurance Cover Stolen Vehicle?

    If you have the right coverage gap insurance would kick in if your vehicle is stolen and recovered yet damaged beyond repair or if it is not recovered.
  • Does Gap Insurance Cover Your Deductible?

    No. This is separate from your gap insurance. If you have an accident covered by your gap insurance policy, you would still have to pay your deductible. In other words, if the “gap” reimbursement amount is $2,000 and your deductible is $500, your total reimbursement amount would be $1,500. Check out our article on how deductibles work.
  • Does Gap Insurance Cover Mechanical Breakdown?

    No. Gap insurance is only used in the event of a total loss from a covered accident, not for mechanical repairs.
  • Does Gap Insurance Cover Death?

    No. Gap insurance is only applicable to vehicle losses and does not cover bodily injuries, medical expenses, lost wages or funeral costs.
  • Does Gap Insurance Cover an Upside Down Loan?

    Yes. An “upside down loan” is another way of describing the gap between what you owe on your auto loan and the car’s actual value. Again, this is why you need to put down at least 20% on your vehicle purchase – this would immediately eliminate being upside down on your loan vs. what the car is worth.

After being in the auto insurance for over 25 years I have, unfortunately seen this play out countless times. People suffering a total loss on their vehicle and then owing more to the bank than they get from the insurance company pay out. This is why we recommend that if you are buying a vehicle less than 5 years old you put money down on the purchase and you contact us to get your Gap Insurance quote.