People often believe that buying the typical package of comprehensive, collision and liability insurance gives them 100 percent protection against a car wreck that totally destroys their car, but this is not true. While GAP insurance does not pay every cost of a complete wreck, it helps defray the costs of an accident that regular insurance cannot or won't cover.

Identification

GAP insurances (Guaranteed Automobile Protection) covers the extra losses after an accident when people owe more on a car than the vehicle's actual worth, reports IRMI Risk Management.

Function

Even a complete insurance package only pays the fair market value for the car, not the value of your loan. A "gap" occurs when you total a car and have say, $20,000 left to pay on a loan, but the car's worth at the time is only $15,000. You still need to pay the extra $5,000 on the loan or lease, reports CarInsurance.com.

Benefits

GAP insurance plans are most beneficial for newer cars, reports AutoInsuranceSelect.com. Cars start losing value as soon as they are driven off the lot, so even a new car can quickly lose several thousand dollars in worth in a short time span. GAP insurance covers the "extra" part of the loan you still owe after a wreck, reducing the costs of a catastrophic event.

Interesting Fact

IRMI Risk Management estimates that 2.5 million automobiles are completely destroyed each year in an accident or incur damages that cost more to fix than the vehicle's worth.

Warning

GAP insurance does not pay for late fees on a loan and only factory options, no aftermarket parts, reports IRMI.

Source:

IRMI Risk Management; Probing the Gaps in GAP Insurance

CarInsurance.com; What is GAP insurance?

AutoinsuranceSelect.com; What is the Definition of Gap Insurance for Auto Insurance?