What is the purpose of "gap insurance"?

The purpose of gap insurance is specifically to cover the difference between the actual cash value of a vehicle and the amount owed on a loan or lease in the event of a total loss. This type of insurance is particularly important for vehicle owners who have financed or leased their cars. In situations where a vehicle is declared a total loss—such as after an accident or theft—the actual cash value reflects the market value of the vehicle at the time of the incident. However, if the owner still has an outstanding loan or lease balance that exceeds this actual cash value, gap insurance bridges that financial gap, ensuring that the owner is not left with remaining payments for a vehicle that they can no longer use.

In contrast, other coverage options mentioned do not address this specific need. For instance, covering the cost of vehicle repairs pertains to standard auto insurance, while liability coverage for commercial vehicles addresses potential damages or injuries caused by a vehicle's operation, and replacement coverage for classic cars focuses on insuring specific types of vehicles rather than addressing the financing gap most often encountered with newer cars.