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Most people buying or leasing a new car need special auto insurance coverage known as GAP insurance. In the event of a total loss on your vehicle, GAP insurance provides coverage against any excess in the amount owed on your vehicle versus its actual value. This coverage is particularly valuable during the first few months after financing or leasing a new vehicle due to the “off the lot” effect on a car’s market value.

Note: GAP insurance is not a substitute for car insurance. It is not a short policy that can hold you over. Instead, it's an addition to car insurance.

Some potential scenarios to illustrate the point:

1) You owe $18,000 on your loan or lease and you destroy your vehicle. The value of the car is $15,000. Without GAP coverage, you will be on the hook for $3,000 to the financing company. With GAP coverage, you owe nothing.

2) Your car is four years old and you are close to paying off your loan. The payoff amount is $8,500 and the current market value is $11,000. You wreck your car. GAP coverage is useless here since you will actually pocket $2,500 after getting a check from your insurance company.

When purchasing or leasing a vehicle, some dealerships will attempt to offer GAP coverage as part of the loan/lease package. It is generally cheaper to waive that offer and receive it through your auto insurance policy. The primary insurance company usually has a 3rd-party appraiser who determines the total loss on a GAP insurance claim.

Many carriers now provide "new car replacement" for newly purchased cars that are less than a year old. In the event of a loss many companies will now pay for total replacement of the vehicle, which would eliminate the need for gap coverage. The only exception would be when you finance more than the purchase price (you traded in a vehicle on which you owe more.

It is also important to note that this may be the right coverage for you even if your car is not brand new. Simply review the amount owed on your financing or leasing plan and compare it to the current market value of your vehicle (KBB.com). When receiving car insurance quotes, be sure to inquire about how much GAP coverage contributes to the total policy premium. This will help you best assess its value to your personal situation.

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