Glossary
Gap insurance, defined
Coverage that pays the difference between what an auto policy settles for after a total loss, the car's market value, and what is still owed on the loan or lease. It exists because a new car loses value faster than a loan is paid down.
In practice
It is offered by dealers and lenders at signing and by many carriers as an endorsement, often at a lower price. It matters most in the first years of a loan with little money down, on a lease, or on a long loan term. Once the loan balance falls below the car's value it does nothing, and it can usually be dropped.
A worked example
Suppose a car is totalled two years into a loan, the carrier settles at a $19,000 market value, and $24,000 is still owed. Without gap coverage you owe the lender $5,000 for a car you no longer have; with it, the coverage pays the $5,000. Hypothetical figures.
Applies to: Auto Insurance