Why is gap insurance considered as a financial safety belt? Simply put, it keeps you from being financially ruined when disaster hits your car. For example you are in this situation, you bought a late-model car three months ago using a car loan with a regular car insurance. The car costs $30,000 and you have already made three payments of $900 each month. Then, disaster strikes. An electric post falls and slams down on your car. The car was flattened to half its height.

Immediately, you reported it to the auto insurance company, which they in turn play with numbers, mileage, depreciation, market values, and other related stuff. After a couple of days, the adjustor informs you that the worth of your car at the time of the accident is $25,000. This is the amount that the auto insurance company will provide you. But the finance company that gave you the loan will still consider the car to be worth its original price. They also play with numbers, interest rates, taxes and license fees. Then they come up with the amount of $38,000. This is the amount that you need to pay them. If the auto insurance company releases the $25,000, where will you get the remaining $7,000? Your car is already a wreck but you still owe the finance company.

You need not face such a dilemma if you have a gap insurance. With the gap insurance, you can ignore the difference between the amount covered by the regular car insurance and the amount you owed the car loan company. This difference is called a “gap” and the gap insurance bridges it so that you need not rack your head for additional financial resources.

A car lease contract must also have a gap insurance. It is a feature that prevents you from draining all your finances. Some dealers who lease cars don't offer a gap insurance. This is okay as long as they include a “gap waiver” in their lease contract. This waiver declares that you are no longer responsible for gap charges that may occur when your leased car is wrecked.

When you get a gap insurance, determine how much is offered in the gap policy. You should also know how much will be added to your monthly bill. A gap insurance, for it to be recognized, must be accompanied with comprehensive insurance policies that cover collision.

Sometimes, a gap insurance may no longer be needed if the terms in your regular auto insurance policy indicated that the company will pay off the full amount you owed from the car loan lender.