Auto gap coverage, or gap insurance, is a stipulation in an auto insurance policy that ensures you'll be covered by the provider for the difference between the value of your car and the total amount of your loan if your car is destroyed.

Gap Insurance Basics

Gap coverage may be a wise investment if you plan to buy a new car and will be making little or no down payment on your car loan. This means that your loan or lease will cover almost the entire value of the car on the day you buy it. During the next few months, the value of your new car will depreciate rapidly, but the principal on your loan will stay high for a while. It's common for new car owners to spend some time underwater, owing more on a new vehicle than it's worth.

If you have an accident and your car is totaled during this underwater period, your collision coverage will only compensate you for the market value of the car. This means that if you buy a $20,000 car and it's totaled a few months later, your insurance company may calculate the car's value at only $15,000 dollars. A driver who has no gap insurance needs to pay the $5,000 difference out of pocket, plus any deductible required by the collision policy.

Those who have gap insurance needs are usually new car buyers who cover most or all of their new car purchase with a financing plan, such as a loan or lease.

Who Doesn't Need Gap Insurance?

You probably don't have high gap insurance needs if you plan to buy a used car, or if you'll be signing a loan for a comparatively small percentage of your entire purchase. You should also forego gap insurance if you're leasing the car and gap coverage will be included in your lease contract, as it sometimes is.

In order to qualify for gap coverage after an accident, your policy will usually require certain conditions. In most cases, your car must be declared totaled, your policy must offer collision coverage and your loan provider must be a financial institution--not an individual.