How does gap insurance work if your vehicle is totaled?

Car being crash-tested

Q. How does gap insurance work? Will it pay off the balance if a vehicle gets totaled out?

 A. Yes, it will.

Gap insurance covers the difference between the actual value of your car and the amount that's left on your auto loan if your car is deemed to be a total loss because of an accident or if it's stolen, according to Jeanne Salvatore, senior vice president of public affairs and consumer spokeswoman for the Insurance Information Institute.

For example, if you purchased a new car with an auto loan and six months later the vehicle was totally destroyed, your basic auto insurance will pay what the vehicle is worth at the time.

But most new cars or trucks depreciate more quickly than owners can pay down the loan they used to buy them. As a result, the vehicle is worth less than what the buyers owe the bank or finance company.

That's most likely to happen when owners make little or no down payment and finance the purchase for 60 months or more.

Gap insurance will pay the difference between what the car is worth and the balance of your loan so that you're not left owing the bank or finance company money on a car you can no longer drive.

The insurance is often something that a car dealer will offer when you buy a car, as opposed to something you'd get as a part of standard auto insurance, Salvatore says.

However, some insurance companies, such as State Farm, include it as part of their auto insurance policy. Others allow you to purchase gap coverage separately. Progressive's gap insurance, which is called Loan/Lease Payoff, costs about $40 a year and covers up to 25% of the actual cash value of your car.