Gap Insurance

AAA

DEFINITION of 'Gap Insurance'

A type of auto insurance that car owners can buy to protect themselves against losses that can arise when the amount of compensation received from a total loss does not fully cover the amount the insured owes on the vehicle's financing or lease agreement. This situation arises when the balance owed on a car loan is greater than the book value of the vehicle.

BREAKING DOWN 'Gap Insurance'

For example, according to the blue book, John's car is worth $15,000. However, he still owes a total of $20,000 worth of car payments. In the event that John's car is completely written off as a result of an accident or theft, John's car insurance policy will reimburse him with $15,000. Because John owes the car financing company $20,000, however, he will still be $5,000 short, even though he no longer has a car.

If John had purchased gap insurance, the gap insurance policy would cover the $5,000 "gap", or the difference between the money received from reimbursement and the amount still owed on the car.

RELATED TERMS
  1. Conditional Binding Receipt

    A receipt involved in life, health and certain property insurance ...
  2. Cash For Clunkers

    A program that allows car owners to trade in their old, less ...
  3. Aggregate Product Liability Limit

    The maximum sum of money that an insurance company will pay during ...
  4. Blue Book

    A guidebook that compiles and quotes prices for new and used ...
  5. Debt

    An amount of money borrowed by one party from another. Many corporations/individuals ...
  6. Insurance

    A contract (policy) in which an individual or entity receives ...
Related Articles
  1. Home & Auto

    It's Raining Lawsuits: Do You Need An Umbrella Policy?

    This type of insurance protects your assets and future wages against lawsuits. Find out if it might benefit you.
  2. Home & Auto

    New Wheels: Lease Or Buy?

    These two major ways to obtain a car have very different advantages and drawbacks. Find out which is best for you.
  3. Options & Futures

    Top Tips For Cheaper, Better Car Insurance

    Accident, theft, vandalism - make sure your coverage will protect you when you need it most.
  4. Insurance

    Life Insurance: Putting A Price On Peace Of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  5. Insurance

    Top 6 Car Insurance Companies in New York

    Read about the top private auto insurers licensed to operate in New York, and learn about recent trends in market share among these companies.
  6. Insurance

    Which Kind of Life Insurance Is Best for You?

    Parse the pros and cons of different policy types to ensure the best coverage for your needs.
  7. Insurance

    Top 5 Car Insurance Companies in Texas

    Examine the five biggest automobile insurance companies operating in the state of Texas, ranked based on market share in the state.
  8. Insurance

    Top 8 Car Insurance Companies in New Jersey

    Read about the top personal auto insurers operating in New Jersey, and learn about recent trends in market share among these companies.
  9. Insurance

    Umbrella Insurance: You May Need It, Too

    If you have assets to protect – or just run a business from home – you could be unpleasantly surprised at how much you need umbrella insurance.
  10. Insurance

    Who is a Beneficiary?

    A beneficiary is a person or entity that receives funds, assets, property or other benefits from a trust, will, or life insurance policy.
RELATED FAQS
  1. What level of reserve ratios is typical for an insurance company to protect against ...

    In the United States, and most developed nations, regulators impose required statutory capital reserve ratios on insurance ... Read Full Answer >>
  2. What risks do I face when investing in the insurance sector?

    Like all equity investments, insurance companies present investors with market risk. Insurance companies, like banks, also ... Read Full Answer >>
  3. Why do insurance policies have deductibles?

    Insurance policies have deductibles for behavioral and financial reasons. Moral Hazards Deductibles mitigate the behavioral ... Read Full Answer >>
  4. Can I buy insurance to reduce unlimited liability in a partnership?

    Partnership insurance is actually quite common. Most of the time, partners buy insurance to safeguard against the possibility ... Read Full Answer >>
  5. Which emerging markets are seeing the strongest growth in the insurance sector?

    The emerging market economies seeing the strongest growth for the insurance sector are primarily the main emerging market ... Read Full Answer >>
  6. Is it more important to have a low deductible or a low premium?

    The choice between a low deductible or a low premium is a personal one. There is no right or wrong arrangement, but there ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Depreciation

    1. A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both ...
  2. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  3. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  4. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  5. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  6. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!