Gap Insurance Definition

The term gap insurance can be used to describe two different insurance situations:

  • When changing jobs or insurance companies, individuals often experience an insurance gap-a period of time when the old insurance policy has stopped coverage but before the new insurance policy has started coverage. This potential problem can be covered by purchasing so-called "gap" insurance. Gap insurance is typically offered for three months or less, usually has limited coverage, and is usually fairly expensive-especially as an employer is not subsidizing the cost.
  • GAP insurance is a special type of insurance that may be required on certain automobile loans. When a new car is purchased, typically it depreciates much faster than the automobile loan is amortized. This means that for the first year, the automobile is worth less-often much less-than the outstanding loan balance. Some creditors therefore require GAP insurance, which provides insurance protection for the difference between the automobile’s actual value and the amount still owed on the loan.