Gap insurance is a type of auto insurance. Not everyone needs it. Unfortunately, some who do need it learn about it too late. If you buy a car with a loan, it may be best to consider the value of gap insurance. It helps protect you from differences between the value of your car and the amount of debt you owe on a loan. It can be confusing, but these tips can help.

What Does Gap Insurance Do?

Those with a significant difference between how much their vehicle is worth today and the amount they owe on a loan should consider it. For example, if you owe $12,000 on your vehicle, but it is only worth $10,000 right now, this coverage may help cover the extra $2,000. When this gap is larger, it is even more important to have protection. This is very valuable especially for new or high-end vehicles.

Who Needs It and Why?

Gap insurance only applies when you file a claim for the total loss of your car. The insurance company might provide you with a claim for the loss. However, it might not provide enough to pay off the debt you owe on the vehicle. Here are some examples.

• You purchase a car. But, cars depreciate very quickly over the first few years. During this time, you could experience an accident that totals the car. This can help pay for the difference between the loan and the actual vehicle value. You don't want to get stuck paying off a note on a car you no longer have, after all.
• You have an older car, perhaps one with little value. However, you owe money on it beyond its value.
• You are leasing a vehicle and the cost to turn the vehicle in or buy it is too high. Gap insurance can help cover some of these fees.
• You borrowed against the value of the car. Your loan is now significantly higher than what the car is worth if sold.
• You rolled negative equity from a previous car onto a new car purchase.

In these situations, gap insurance gives you some financial peace of mind. It helps minimize the risk you will pay out of pocket for losses related to accidents. Remember, most insurance policies only pay at the value of the car right before the incident. This may be a fraction of what you owe on the vehicle loan, though, making it costly to be without any type of gap coverage.