Describe “gap insurance” in relation to vehicle financing.

Gap insurance is specifically designed to protect vehicle owners who finance or lease their vehicles. In the event of a total loss—such as theft or a severe accident—standard auto insurance typically covers the vehicle's actual cash value (ACV) at the time of the loss, which may be less than what the owner still owes on the loan or lease. Gap insurance bridges this financial gap by covering the difference between the ACV and the remaining balance on the loan.

This is especially crucial for new vehicles, which often depreciate quickly in value, sometimes leading to a situation where the borrower owes more than the car is worth. By providing this coverage, gap insurance can prevent financial hardship for the owner, ensuring that they are not left paying out-of-pocket for a vehicle they can no longer use. This makes it a valuable product for anyone who is financing a vehicle, as it safeguards against potential financial pitfalls associated with depreciation and outstanding loans.