What does gap insurance cover?

Gap insurance specifically covers the difference between the actual cash value of a vehicle at the time it is totaled or stolen and the outstanding amount still owed on the vehicle loan. In many cases, when a car is involved in an accident or theft, its market value might be significantly lower than the amount the borrower still owes to the lender. This discrepancy is known as the "gap."

For instance, if a vehicle is worth $20,000 at the time of an accident, yet the owner owes $25,000 on their auto loan, gap insurance would cover the $5,000 difference, ensuring that the owner isn't left to pay out of pocket for the amount they still owe the lender.

This coverage is particularly important for individuals who financed their vehicle with a loan, as it protects against financial loss when the vehicle's worth dips below what is owed. Other options do not align with the primary purpose of gap insurance, making them less relevant to the question.