What Does Gap Insurance Cover?

Gap insurance makes up the difference between what your vehicle is actually worth and how much you owe.

When you finance a new vehicle, you could experience some unintended consequences if you're involved in an accident. Purchasing gap insurance when you buy the car can help protect you from a large financial loss.


In some situations, you may owe more on your vehicle in finance payments than your vehicle is worth due to factors like rolling an existing car loan into a new loan during a trade-in, or due to your vehicle's depreciation. Gap insurance covers any difference between what your vehicle is worth and what you owe.


Gap insurance is beneficial in the event your vehicle is totaled in an accident. Your car insurance company will only pay what it determines to be your vehicle's actual cash value (ACV), which may be far less than what you still owe. Without gap insurance, you would have to make up the difference out of your own pocket.


According to Edmunds.com, gap insurance is a good idea if you put less than 20 percent down when buying a vehicle or if you finance it for 72 months or more. You should also consider it when purchasing a rapidly depreciating vehicle such as a luxury car.