What Is Loan/Lease Payoff Insurance?

Definition and Examples of Loan/Lease Payoff Insurance

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Loan/lease payoff insurance provides some coverage beyond your vehicle's actual cash value if it's stolen or declared to be a total loss. This provides coverage if you find yourself "upside-down" or "underwater" on an auto loan or lease and 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 when you purchased it.

What Is Loan/Lease Payoff Insurance?

Standard loan/lease payoff insurance pays the amount you owe on a totaled vehicle’s loan after your insurance company has paid you because your car has been totaled in an accident or it's been stolen.

You can only purchase this type of insurance if you're buying the most comprehensive coverage insurance on your vehicle. It typically pays up to 25% of the vehicle's actual cash value (ACV), allowing for any insurance deductible.

The term "loan/lease payoff" is often used in place of gap insurance. Both coverages work in a similar way, but there are some subtle differences between the two. Providers can assign their own sets of rules to loan/lease payoff insurance that separate one type of insurance from the other. Other providers might not distinguish between the two coverages at all.

Progressive is one notable insurer that lumps loan/lease payoff coverage with a gap insurance product.

How Loan/Lease Payoff Insurance Works

Let's say that John has purchased a new Chevy truck for $28,000. He purchased the truck with a zero down payment and an extended six-year loan to keep his payments low.

Unfortunately, the truck is stolen within a month of purchase. The insurance company determines that the ACV of John's truck is just $21,000 due to the plunging value of these vehicles when they're driven off the lot. That's a difference of $7,000 compared to what John owes on the loan.

Luckily, John purchased loan/lease payoff coverage through his car insurance provider. This insurance will cover 25% of his ACV. It works out like this:

  • 25% of $21,000 is $5250.
  • The insurance company will therefore pay $26,150 after subtracting a $100 deductible.
  • John is responsible for paying for the remaining $1,850 balance.

John must come out of pocket to meet his obligation, but he's still better off than he would have been without the loan/lease payoff coverage, even though his loan wasn't paid off in full. And this is an extreme example of depreciation and no down payment, and it's an unlikely scenario.

In most cases, you would find that 25% of the actual cash value will cover the remainder of your loan in its entirety.

Loan/Lease Insurance vs. Gap Insurance

Gap insurance tends to be a bit more generous and flexible than loan/lease payoff coverage and in some critical ways. You can often avoid out-of-pocket costs at all with gap insurance. You won't be forced to come up with a portion of the balance in order to retire the loan against the destroyed or stolen vehicle.

Loan/Lease Payoff Insurance Gap Insurance
Does not cover deductibles May cover deductibles
Pays only up to 25% of the vehicle's actual cash value Pays the difference between the vehicle's actual cash value and the loan balance against it

Do I Need to Buy This Coverage?

It's always best to discuss this type of coverage with your insurance agent rather than deciding on your own whether you need it. Make sure you understand all the details and restrictions that apply to loan/lease payoff agreements.

It can provide helpful coverage even if it doesn't pay 100% of what you owe, and it will certainly come in handy compared to not having any access to coverage when you know you're underwater on your car loan; though some consumer advocates argue that the premiums for these coverages often are too high given that claim payouts are fairly infrequent.

Key Takeaways

  • Loan/lease payoff insurance will pay up to 25% of your vehicle’s actual cash value after your insurance company has paid you if the vehicle is stolen or totaled.
  • Your insurer must declare the vehicle a total loss.
  • You can usually add loan/lease payoff coverage to your auto insurance coverage at any time. There’s no deadline for making the decision.
  • You must have existing full coverage on your vehicle to qualify.