GAP insurance, also known as Guaranteed Asset Protection, is an optional type of car insurance that can be added to a standard auto insurance policy. It covers the difference or gap between what you owe on your car loan or lease and the car’s actual cash value if it is totaled or stolen.

How does GAP insurance work?

When you purchase a new car, its value starts to depreciate as soon as you drive it off the lot. If your car is stolen or severely damaged in an accident, your regular auto insurance will typically only cover the current market value of the vehicle, which may be less than what you owe on your loan or lease.

This is where gap insurance comes in. If you have gap insurance, it will pay the difference between the amount you owe on your car and the car’s actual cash value. This means you won’t be left with a significant financial burden if your car is deemed a total loss.

For example, let’s say you owe $20,000 on your car loan, but its actual cash value is only $15,000 at the time of the accident. If you have gap insurance, it will cover the $5,000 difference, ensuring that you don’t have to pay out of pocket to settle your loan.

Final thoughts

GAP insurance typically has certain limitations and exclusions. It may not cover the deductible on your primary auto insurance policy or any other expenses, such as your medical bills or damage to other people’s property.

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