Since auto value may depreciate in value after usage in the first few years, the insurance will bridge the "gap" that may arise when the auto gets totaled and the loan was not settled.
How Gap Insurance work
A car is purchased at $30,000 from a car dealer financed by a loan or by leasing. During its use over the years, the car value depreciates to $25,000. Then, the unfortunate happens and the car is totaled without having cleared the auto loan. In most cases insurance company will pay for the current market value of the car which is $25,000. Who will pay for the $5,000 difference?
Here is where the Gap insurance come in. The Gap insurance will settle the $5,000 difference or "gap" realized from car depreciation in value and you will not realize any financial loss as a result of car depreciating in value and as a result of total loss.
Mostly, Gap insurance is considered optional and not a must to own one as per law, however, the car owner should consider purchasing a policy that will ensure and insure them against financial losses that may result from total loss of a depreciated loaned or leased vehicle.
Finally, if you consider purchasing a Gap Insurance policy from insurance company or agents, Before purchase it is advisable to compare different company options and covers, read through the policy details and speak to an insurance professional to guide you on whether it's the right policy for you. That is, it covers what you intended to be covered and the right premium price amount.
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