Gap insurance essentially is a financial bridge between what you owe on a car loan and what the vehicle is estimated to be worth. Sometimes known as loan/lease or loan/lease payoff insurance, this coverage can be a necessity for those who buy or lease vehicles.

Top What Gap Insurance Covers

New cars depreciate rapidly, sometimes by as much as 30% within the first three months after purchase. When someone steals a car and it can't be recovered, or if a car is totaled in an accident, your insurer will only pay the vehicle's calculated value right before the incident. This leaves many new car owners or lessees with a large discrepancy between the money their insurer gives them and what they owe on their car loan.

Gap insurance fills this void.

Let's say you buy a new car for $30,000. You make a $2,000 down payment, take out a $28,000 loan, and set up monthly $250 payments.

Four months later, you owe $27,000 on the loan. However, your car gets destroyed in a wreck. Your insurer estimates the car's market value, and pays you $21,000 for your loss. That means you're facing a $6,000 difference between how much you owe the lien holder and the amount you received from your carrier.

Gap insurance eliminates this deficit, and bails you from this financial hole. And, sometimes it even pays your car insurance deductible.

Top Who Needs Gap Insurance

Whether you need―or are required to have―this guaranteed auto protection (GAP) depends on a few factors.

Lease contracts often state that lessees must have this insurance; often, it will be included in the lease agreement for a fee. Otherwise, you probably won't be forced to obtain the coverage.

But, the smaller your downpayment, the more important gap insurance becomes. And, the newer and the more expensive the car, the more having this insurance may be a sound move. Remember, this insurance basically involves the depreciation of your vehicle.

Keep in mind, though, there are limits on how much a gap policy will pay; check with your prospective gap provider for details. Also, many gap policies require you to carry comprehensive and collision coverage with your personal auto policy. And, other conditions may apply.