Loan Lease Payoff Coverage

Loan lease payoff coverage, also called gap insurance, is a special type of insurance coverage that can be purchased for leased and financed vehicles. Most lending institutions offer loan lease payoff coverage as part of the terms of the loan or lease.

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Eric Stauffer is a former insurance agent and banker turned consumer advocate. His priority is to help educate individuals and families about the different types of insurance they need, and assist them in finding the best place to get it.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insuranc...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Jul 29, 2020

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Loan or lease payoff coverage, also called gap insurance, is a special type of insurance coverage that can be purchased for leased and financed vehicles.  This type of insurance is used to pay the gap between what a car is worth and what you may owe on it in the event of a total loss.  Depending on your situation, gap insurance may be a requirement from your lien holder or leasing agency, or it may be an optional coverage.  Either way, gap insurance can be extremely valuable and protect you from financial hardship and unwanted surprises down the line.

Why You Need Loan Payoff Coverage

When you purchase a vehicle, that vehicle begins depreciating in value as soon as you drive it off the lot.  A car loan cannot keep up with the rate of depreciation on a brand new vehicle.  This means that you will almost always owe more on your vehicle than the car is actually worth in the beginning.  If you attempted to re-sell the vehicle, for example, you might not be able to get enough for the car to pay off the balance of your loan, especially if you sell the car shortly after buying it.

The same is true of vehicles that are totaled in car accidents.  A vehicle is deemed to be a total loss any time it is not economically or physically feasible to repair a vehicle.  A newer model car could be totaled by engine or transmission damage, fire damage, frame damage or body damage to multiple panels.  In some cases, airbag deployment is enough to render a vehicle totaled as the airbags can be very pricey to replace.

Once a car is declared a total loss, your insurance company will determine its actual cash value and offer a settlement based on that figure less any deductible you may owe.  If you are making payments on the vehicle, the lien holder or leasing agency is the legal owner of the car; this means that they will be paid off first.  After the insurance company has satisfied the lien, you would receive any overage.

If, however, you owe more on the vehicle than it was worth, you will find yourself continuing to owe the loan company for a vehicle you no longer own.  In order to avoid the uncomfortable position of making payments on a vehicle that’s been totaled, you can purchase gap insurance.

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Where to Buy Gap Insurance

Most lending institutions offer lease gap insurance as part of the terms of the loan or lease.  This insurance is underwritten by the lending agency, and the expense is added on to the other costs of the loan.  You pay for the gap coverage as part of your car payment.  For this reason, many people don’t realize that they already carry gap insurance.  Be sure to check your statement to see if it’s included or contact your lender to confirm before buying additional coverage.

If you do not already have loan payoff insurance through the lending agency, you can usually purchase it through your private auto insurer.  Although these coverages are not always widely advertised by insurers, they’re usually available if you ask.  In most cases, the monthly fee to add this coverage to your policy is quite affordable and definitely worthwhile.  A few extra dollars a month is far superior to being stuck with a car payment for a totaled vehicle in the event of a major accident.

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