As the name suggests, this is an insurance policy that fills the gap your car insurance leaves when tragedy strikes too soon. Here is a typical example. You obtain financing to purchase a brand new car but two months down the road your car is completely destroyed in an accident or a huge tree falls on it and just flattens it. The insurance company decides that at the time of the accident, the vehicle was worth 20 per cent less its' purchase price. However the finance company still wants you to pay back the cash you borrowed to purchase the car in full. And since you have only made two payments so far, when you add taxes and interest, you still owe the finance company more money that the value of the car when it was brand new? So how do you make up the difference in cash that can be quite substantial? The answer is gap insurance.

In fact gap insurance is extremely important for most drivers because the truth is that if something serious happens to your car in the first year or so of purchase, you will end up with a big difference to settle with your financier. This is the reason why gap insurance is a must in most lease contracts. In some cases lease contracts may include a gap waiver, which means that you are protected from gap charges and you do not require gap insurance.

Even with gap insurance you need to be careful to follow the instructions issued by the car insurance company. For instance many times, if your car is completely destroyed, some insurance firms insist that you continue to make loan payments for your shell of a car until money from the gap insurance is paid out.