Gap insurance, or guaranteed auto protection, protects a buyer or leaser from loss when a vehicle has been stolen or damaged beyond repair. When the value of the loan taken out to buy the vehicle is more than the current market value that insurers pay, gap insurance makes up the difference in the coverage.
Many companies that lease vehicles require gap insurance coverage and even include it as part of the lease agreement. Buyers often need gap coverage if they purchase a vehicle that depreciates quickly, take out a long-term loan or make little or no down payment. They may also need gap coverage if the vehicle loan was worth more than the purchase price because it included extras such as license, registration, taxes and warranties.
Gap insurance can be bought through a car dealership, but this option is often a substantial one-time charge that ultimately is more expensive for the buyer. When insurance companies sell gap coverage, it is usually a small cost added to the regular insurance premium. The buyer has the option of canceling the coverage if the negative equity on the vehicle lessens over time. Buyers of gap insurance should ensure that it covers all eventualities, including accidents, theft and natural disasters. They should also make sure that the coverage includes the amount of the insurance deductible. Some gap insurance policies provide vehicle replacement, even if the current value of the replacement vehicle is higher than the price of the original vehicle.