What type of insurance covers the gap between what is owed on a vehicle and its actual cash value in the event of a loss?

GAP insurance is specifically designed to address the difference between the amount owed on a vehicle and its actual cash value in the event of a total loss. When a vehicle is financed or leased, the owner may owe more on the loan than what the vehicle is worth, especially in the case of depreciation. GAP insurance provides coverage for this difference, ensuring that the insured does not face a financial shortfall.

For instance, if a car is totaled in an accident and its actual cash value is determined to be $15,000, but the owner still owes $20,000 on the loan, GAP insurance would cover the $5,000 difference. This is particularly valuable for new vehicles, which can lose value quickly after purchase.

Liability insurance, on the other hand, covers damages and injuries you may cause to others in an accident but does not cover your own vehicle's value. Collision insurance covers damage to your vehicle from accidents, while comprehensive insurance covers non-collision-related damages, such as theft or natural disasters. Neither of these types of coverage addresses the financial gap between the loan balance and the vehicle's actual cash value, which is the distinct role of GAP insurance.