Gap insurance is a type of coverage that pays the difference between the cash value of a vehicle and the amount owed on it. When a serious accident occurs and the car is totaled, the insurance company doesn’t write a check for the full replacement value of the vehicle.
Instead, they make a payment based on the cash value of the vehicle (less the policy deductible). The deductible is the amount that an insurance customer agrees to pay themselves when they make a claim against the policy. It is possible for a person who has financed a vehicle to owe more on it than the cash value is. Buying gap insurance coverage protects the car buyer in this instance.
If the buyer pays cash for the vehicle and no lender is involved, there is no advantage t buying gap insurance coverage. Instead, he or she can simply arrange for insurance coverage that will protect the vehicle if it is damaged in an accident or due to another reason. Collision coverage will pay for the cost of repairing the vehicle if it is damaged in an accident.
The person buying insurance coverage may also want to consider buying comprehensive coverage as well. This type of policy pays out if the car is damaged due to fire, hail or wind. It also pays compensation to the insured if the car is stolen.