Gap Insurance: What is it and Do You Need It?

A standard question asked by a dealership when you lease a vehicle or finance a vehicle is whether or not you want gap insurance. All too often buyer's have little understanding of what gap insurance is and then typically decide to forgo this insurance. A dealer may give you a brief overview of gap insurance and possibility even suggest that you purchase it, but many car buyers may believe it's simply a way for dealers to make more money. Other potential buyers may believe that there standard collision based automotive insurance provides them with gap insurance, but this is incorrect.

Understanding what gap insurance is can help you make the correct choice when determining whether or not your need this insurance on your vehicle. For some, gap insurance will provide peace of mind, for others it could mean saving thousands of dollars later on.

Here's a basic description of gap insurance. Gap insurance is designed to provide a buyer or vehicle lessee with valuable coverage for their vehicle during the first few years of your loan or lease. Gap insurance will reimburse you if the vehicle that you are driving is a total loss. It protects you from potential financial hardships.

For example, if your car is declared as totaled from an accident, fire, theft, vandalism or other event your insurance company will pay you what they call the actual cash value of the vehicle. This cash value is a predetermined number that can not be easily negotiated. If the actual cash value paid by the insurance company is less than what you owe on the vehicle, you are still obligated to pick up the additional expenses. Basically, you are without a car and will still have to pay off your finance company to make up the difference between the value paid to you and the amount owed to the finance company. In certain situations this amount could be thousands of dollars. This difference is referred to as the "gap."

What gap insurance does is essentially cover the "gap." The gap insurance plan will pay off the amount still owed to the finance company after your traditional insurance has paid out their stated actual cash value. Gap insurance virtually guarantees that you will have no additional out of pocket expenses if you vehicle is declared a total loss. Between your standard automotive insurance pay out and your gap coverage, the amount financed will be covered 100%. The totaled vehicle is a loss, but you will incur no additional expenses or worries and are free to finance another vehicle.

Now that you understand gap insurance you are ready to read about who will benefit from gap insurance and whether or not gap is right for you.

Source: Car Insurance.com "What is GAP Insurance"