What is Loan Payoff Insurance Coverage?

If you have taken out a car loan for a vehicle or are leasing a car, you need to make sure you're carrying the right type of insurance. Most lenders and dealerships that you lease a car from require you to have both comprehensive and collision insurance for the vehicle. These insurance plans pay for the cost of repair or replacement of your vehicle in the event of a collision with another vehicle or object, when your car is vandalized or damaged by natural disasters, or when the car is stolen.

However, there may be a "gap" in a payoff amount if the value of your car is currently less than your loan amount. In the event that your vehicle is declared a total loss after an accident, loan payoff insurance coverage can pay what you owe on an unpaid loan. Here's a close look at how loan payoff insurance coverage works, and why you may need to purchase this type of insurance plan:

How Loan Payoff Insurance Coverage Works

When you owe more on the car than its actual cash value and the car is declared a loss after an accident, the difference between the outstanding loan amount and the actual cash value of your loan will be your responsibility -- unless you have loan payoff insurance coverage. You can purchase this type of specialized insurance plan for a vehicle when you want to ensure your car will be covered after your comprehensive and collision insurance has paid for costs, less your deductible. The insurance company will issue a check directly to you, and you can use that to pay off the outstanding loan.

Getting Loan Payoff Insurance Coverage

If you are making very high payments on a loan, purchased a vehicle that is depreciating very quickly (losing value), or ended up having to take out a loan with a higher-than-average interest rate, it may be in your best interest to have loan payoff insurance coverage. The premium for loan payoff insurance coverage varies by policyholder because the insurance company will calculate costs based on the type of vehicle you are insuring. In most cases, the payoff amount will not exceed 25% of the vehicle's actual cash value.

This type of insurance is only extended to customers who have an auto loan from a recognized financial institution. You will not be eligible for loan payoff insurance coverage if you borrowed money from a friend or family member to purchase a car.

Sources:

Progressive -- Loan/Lease Payoff Coverage FAQs

DMV.org -- Loan Lease Payoff Coverage

AutoQuoteNow.com -- The Loan/Lease Payoff Coverage