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Gap Insurance covers the difference between what you owe on a car loan and the market value of the car. Gap insurance is designed to pay the outstanding loan amount should the policyholder be involved in an accident in which the cost to repair the vehicle exceeds the market value of the car.
For example, let's say that a two year old car still has an outstanding loan amount of $12,000 on the day of the accident. Let's also assume that the fair market value of the car was $8,000 at that time and the cost to repair the car is more than $8,000. Since collision insurance will only pay for repairs up to the fair market value of the car the insurance company will only pay the policyholder $8,000. Gap insurance would pay the additional $4,000 to satisfy the loan amount of $12,000.
If the policyholder did not purchase gap coverage, they would be responsible for the $4,000 difference between the fair market value of the vehicle and the outstanding balance on the loan. |
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