Ask the Car Insurance Expert
Do I continue to pay the lien holder if my car is totaled?
Yes, you still must pay the lender if you have a car loan, regardless of the vehicle's condition. Ideally, you'll owe the lender less than what the car is worth, so you can use the payout from the auto insurance company to pay off the loan and pocket the rest to go toward the purchase of another vehicle.
However, if the amount the insurance company pays for your totaled car is less than what you owe, you'll have to come up with the rest of the money to pay off the loan--unless you have gap insurance.
Standard car insurance policies pay you the "actual cash value" of the vehicle when it's totaled, which can be hundreds or thousands of dollars less than the amount owed on a car lease or loan. This could be the case for a new car because of depreciation. A new car loses 11 percent to 20 percent of its value in the first year, according to the National Automobile Dealers Association.
How gap insurance works
Gap insurance pays the difference between the amount you collect from the insurance company for a totaled car and the amount you owe on a lease or loan. Gap insurance is often included in many car lease contracts automatically, but you must stay in compliance with the lease for the coverage to pay out.
However, if you finance a car through a bank, gap coverage is not automatic. You can buy gap coverage from a variety of insurance companies, but some insurers don't sell it at all. Other companies make gap insurance available only for new vehicles and may require you to purchase collision and comprehensive coverage as well.
Unfortunately, it's too late to purchase gap insurance if your car is already totaled.
For more, see Save yourself some car insurance grief: Buy gap coverage.