What is Loan/Lease Payoff Insurance?

Man with crashed car calling for roadside assistance,
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Loan lease payoff gives you coverage beyond your vehicle's actual cash value. It is an important coverage when you owe more than what the vehicle is worth. This can happen as soon as you drive your vehicle off the lot, depending on the size of your loan and whether the vehicle was new or used.

Loan lease payoff is a term that is used loosely. It can be confusing because at times it is used in place of the term gap insurance. Other times it has its own set of rules varying a little from gap insurance.

Standard Loan Lease Coverage Conditions

Standard Loan Lease Coverage kicks in to cover the amount you owe on a totaled vehicle’s loan once your insurance company has paid you. It is only purchasable if you are buying the maximum coverage insurance on your vehicle – otherwise, people might take advantage of low insurance rates and end up sticking it to the lenders more often.

Common Lease Conditions

  • Max payout is 25 percent of your vehicle's ACV
  • If loan/lease payoff is offered, it can be added onto your policy at any time
  • Your loan cannot be from an individual
  • Your vehicle must have full coverage
  • The insurance company must deem your vehicle a total loss

Example: John just purchased a brand new Chevy Silverado for $28,000. He purchased the truck with zero down and an extended six-year loan to keep his payments down. Unfortunately, the truck is stolen within the first month of purchase. Due to the infamous plunging value of a new truck being driven off the lot, the insurance company determines the ACV of the vehicle to be $21,000, a difference of $7,000 compared to what is owed. Luckily, John purchased loan/lease payoff through his car insurance, which will cover 25 percent beyond his ACV.

Twenty-five percent of $21,000 is $5250, so the breakdown is as follows.

  • The insurance company will pay $26,150 after subtracting a $100 deductible
  • John will be responsible for the $1,850 remaining

Even though John's loan was not paid off in full, he is much better off than without the loan/lease payoff coverage. This is an extreme example of depreciation, low down payment, and a hopefully unlikely scenario; typically you will find 25 percent of the actual cash value will cover the remainder your loan in its entirety.

It is always best to discuss this type of coverage with your insurance agent rather than going alone. Learn all the details and restrictions that apply to loan lease payoff agreements. It can be a very helpful coverage even if it does not pay 100% of what you owe. It will certainly come in handy when compared to not having any access to coverage when you know you are underwater on your car loan.