This is where this type of insurance gets its name from. When you're getting another car to replace your old one, there's a gap between the amount that your insurer will pay out and the amount you originally paid. If you choose to buy this type of insurance, this is the 'gap' it covers.
Gap insurance only covers your vehicle and doesn't provide coverage for personal injury, and that's why it's best purchased as a supplement to your existing car insurance plan.
How Gap Insurance Works
If you're involved in an accident where you're not at fault, and your car is beyond repair and needs to be replaced you can use gap insurance to get the full cost of what you paid for your car. Gap insurance can also help you to pay off the loan that you taken out to help you pay for the car. For example, if you still owe $10,000 on your car loan, but your car is only worth $7,000, your gap insurance plan can help you to pay the difference between what you owe on your loan and what your car is actually worth.
Something to consider is that gap insurance doesn't cover your deductible. If you're reimbursed $5,000 as a result of your gap insurance plan, but your deductible is $1,000, the total amount of your reimbursement would be $3,500. While this type of insurance can still save you money, it's worth remembering that the cost of your deductible will not be covered.
Should I Get Gap Insurance?
Gap insurance isn't essential as your car insurance provider will generally pay out for a replacement car that is the same condition, value, and age as your previous car. So, in theory, you wouldn't be any worse off.
If you have a fully comprehensive car insurance plan, it's likely that your plan will have a clause that stipulates new cars can be replaced within 12 months of the date of purchase. This is usually only active during the first 12 months of ownership, and as such it could be a good reason to wait a while before getting gap insurance for your new car. However, if you're concerned about losing out on what you paid for your brand new car, you should definitely consider investing in gap insurance.
Gap insurance is a good choice for people who have financed the purchase of their car for the period of time when their car is worth less than what they owe on the loan. This may only be a small window in some instances, but it's worth being covered for that period of time. There may not be much point in purchasing gap insurance if you're buying a used car, or if your car doesn't have a high cash value to begin with.