What does gap insurance typically cover?

Gap insurance is designed to protect borrowers in the event that their vehicle is totaled or stolen, especially when they owe more on their auto loan than the vehicle's current market value. When an accident occurs, auto insurers typically pay out the actual cash value of the vehicle at the time of the loss, which often is less than the remaining loan balance.

Gap insurance covers this difference, ensuring that the borrower is not financially burdened by the amount owed on the loan that is not covered by their standard auto insurance payout. This makes it an essential coverage for those who have financed a new or expensive vehicle, as depreciation can quickly create a significant gap between what is owed and what the vehicle is worth.

The other options do not accurately define gap insurance. While the concept of the current versus market value can relate to insurance claims, it does not capture the primary purpose of gap insurance. Total replacement cost coverage is also a separate type of insurance that is not the focus of gap insurance. Lastly, coverage for deductibles is unrelated to the specific function of gap insurance, which is to cover the financial difference in vehicle value rather than out-of-pocket costs associated with claims.