What Does GAP Insurance Cover?

GAP insurance is a type of auto insurance that protects you in the early years of owning a car when you may owe more than the car is worth. The fact is that if you buy a new car, it decreases in value as soon as you drive it off the lot. It will decrease in value rapidly over the first year or two and then level off. GAP insurance covers you for this gap between the value of a car and how much you owe on it.

For example, let’s say you have had a new car for about a year, and you owe $15,000 on it. However, the book value of your car is only about $10,000 because it has depreciated so much in this first year. Do you see the $5,000 gap? OK, now you get in an accident and your nice one-year-old car is totaled. The insurance company will pay you the $10,000 value of the car, but you are on the hook for the full $15,000 that you owe on it. That is where GAP insurance comes into play. Your GAP insurance will make up the difference between what you owe on the car and what the insurance company says it’s worth. Most such GAP policies will cover both accidents and theft; check to make sure.