Do I Need Loan/Lease Payoff Coverage for Auto Insurance?

Gap coverage guarantees that your loan gets paid off.
i George Doyle/Stockbyte/Getty Images

Most states require you to pay for auto insurance to protect other drivers on the road from the expenses you could cause them if you hit them. However, you have more latitude to choose which other types of coverage you want. If you choose, you can buy insurance that will pay to repair or replace your car if it gets damaged. However, you might not have enough coverage to pay off your entire loan or lease unless you buy special payoff or gap coverage.

Collision and Comprehensive Coverage

Collision coverage pays to fix your car if you are in an accident. Comprehensive coverage insures your car for anything else that might happen, like having it stolen, having something fall on it or being the victim of vandalism. Together, these types of insurance are sometimes referred to as full coverage.

How Insurers Pay

If your car gets damaged, the insurer will pay to repair your car, and if it gets stolen, it will pay to replace it. However, what your insurer will pay might not be enough to cover your loan. Usually insurers pay what your car is worth in terms of what it would cost you to buy a comparable car. For example, if your car is stolen and a comparably equipped car of the same year with the same approximate mileage costs between $11,000 and $12,000, your insurer would pay you somewhere in that range, plus any of the other costs you'd incur to buy the car, such as taxes and titling fees.

Value vs. Debt

If your car gets totaled and is worth $11,500 but you only owe $8,500, your check from your insurer should be more than enough to buy a replacement car and make a down payment. However, if you owed $13,000 on your car, you'd still owe $1,500 after your car loan company took your insurer's $11,500 check. In that case, loan/lease payoff coverage, or gap coverage, would be valuable since it would pay the difference.

To Buy or Not to Buy

If you owe more than your car is worth, loan/lease payoff coverage could be a good investment. However, you should keep an eye on your loan balance and on your car's value. If your loan balance drops faster than your car's value, at some point you could end up owing less than your car is worth. If you can cancel your gap coverage at that point, you might save some money. Sometimes your financing contract will already include gap coverage so that you don't need to buy a separate policy.

the nest