GAP Insurance, also known as loan/lease payoff coverage, will protect you from financial burden if your automobile is destroyed before you have finished paying off your car loan. Many insurance companies will allow you to buy GAP insurance at any time during the term of your lease, although generally it is purchased at the time of lease. Leasing contracts typically require that you have collision and comprehensive insurance.

Depending on your insurance company, you may have to pay loan payments after your car has been destroyed in order to counter-balance or compensate for the amount paid by the insurance. A GAP insurance policy can help protect you in a case like this.

Buying a new car should be a happy time in your life. But if your car depreciates in value and you are in an accident, your insurance may not be willing to pay the amount needed for you to carry out your loan/lease.

Most insurance companies merely pay the actual cash value of a car (ACV) when it is totaled. This can be a problem for many new car owners, because new cars tend to depreciate in value after only one year.

It’s this very depreciation that creates what is called a “gap.” Let’s say that you pay $60,000 for a new car. You may put down $10,000 up front, and take out a lease or loan for $50,000. If you drive the car for one year, paying $500 a month (that is equal to 6,000 dollars) and the car has depreciated in value by $10,000 during that time. This means that the car’s actual value is now $44,000. However, you still owe $54,000 on your car loan or lease. This “gap” of $10,000 would have to be paid out of pocket if you did not have GAP insurance.

GAP insurance is not required by any state; however it is important to understand that if you are in an accident you will have to pay for this expense out of pocket. Many people may not be able to do this, and that is why it is often mandatory to purchase GAP coverage if you are taking out a car loan or a lease. Furthermore, if you have bought an expensive car, why on earth would you consider driving without this coverage? Cars are almost always worth more than their actual cash value. Make sure that you are protected by buying Gap insurance.

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