How does gap insurance work after receiving a car insurance payout?

I owe $15,000 on my loan. The insurance payout with my new car replacement coverage is $19,000. My insurance said the settlement is being sent to my lienholder to deduct the balance I owe, and the rest will come to me. Shouldn't my gap insurance cover my loan so I get the full settlement value?

Answer
Gap insurance is designed to protect a borrower if their vehicle is totaled and they owe more on their loan then the actual cash value of the vehicle. Since your settlement amount is more than what you owe on your loan, your gap coverage wouldn’t apply.
New car replacement coverage ensures that if your new vehicle is marked a total loss in the first one or two years of ownership, you’ll receive a payout that will allow you to get a comparable vehicle. This is why you received a larger settlement amount.
Insurance is designed to restore you to your pre-accident financial state. If you received the full settlement value and your loan was paid off by your gap insurance, you would be benefiting from your insurance transaction, which isn’t the purpose of insurance. “
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Emily Maracle
Answered on May 07, 2021
Emily Maracle is a car insurance specialist living in New York. Originally from the Pacific Northwest, she has a degree in English Literature and a background in customer service. She enjoys cooking, gardening, and living sustainably. In the future, she can't wait to upgrade to a hybrid or electric car.
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