Gap insurance may cover some or all of an eligible shortfall, subject to the product’s terms.
Our team looked into Ontario’s OPCF 43 waiver-of-depreciation form and the Financial Consumer Agency of Canada’s car-insurance guidance to write this guide.
Read More: Waiver of Depreciation Endorsement Explained
How Exactly Does Gap Insurance Work?
Gap insurance may pay or waive the difference between a covered total-loss settlement and what you owe on the vehicle, depending on the product.
For instance, let’s say your insurer determines that your car is a total loss. If you owe your lender $15,000 but the settlement is $12,000, you’ll be left with a $3,000 shortfall.
Gap insurance does not automatically cover that difference. Benefits are subject to limits and conditions, which may include:
- Exclusions for extended warranties, lease costs and modifications that aren’t original to the vehicle
- Caps on the amount you’re entitled to receive
- A requirement to maintain physical-damage coverage
- Restrictions on when you can buy the product
- Restrictions on which vehicles qualify
- Conditions governing which total-loss claims are covered
Read More: How Car Write-Offs Work
Things to Consider Before Buying Gap Insurance
If your car has positive equity, gap insurance won’t offer much value. If you’re leasing your car, the agreement may already waive shortfalls following a total loss. Read your lease terms before you consider gap insurance.
The longer your loan is, the greater the risk of owing more on the vehicle than you’re entitled to receive for it. To determine whether you could face a shortfall, start with your loan payoff amount.
Keep in mind:
- Your deductible, which may be deducted from the settlement
- Negative equity rolled into the loan, which gap insurance may not cover
- Financed add-ons, warranties or modifications, which may not be covered
- The maximum amount the gap product will pay or waive
- The cost of gap insurance compared with the potential shortfall
- Whether you receive a refund if you pay off the loan early
Read the product’s terms before buying it. The name alone does not tell you which shortfalls, loans, leases or total-loss claims qualify.
Bottom Line
- Gap insurance may apply if the vehicle is declared an eligible covered total loss and the settlement is less than the qualifying balance.
- Consider whether it’s worth buying gap insurance before asking your insurer or car dealership.
- Aside from gap insurance, you can consider a waiver of depreciation or Optiom insurance for similar types of protection.