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Your car insurance company will settle any losses on an actual cash value basis. This means they will take the replacement cost and subtract an amount for "wear and tear" on the vehicle. This amount is called depreciation. The older the car, the more depreciation will be deducted from the value of the vehicle. As soon as you drive a new car off the dealer's lot, the vehicle depreciates substantially. Gap insurance is an added coverage that you can purchase on your personal car insurance policy to cover the "gap" created between what you owe on your car and the actual cash value of the vehicle. For example, let's say you purchase a new 2008 Honda Accord for $24,000 and finance the entire amount through American Honda Finance. You notify your insurance agent of your new vehicle and the car is added to your car insurance policy with American Honda Finance as the lienholder on the vehicle.
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What is gap insurance coverage and do I need it for my new car?
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