Guaranteed Auto Protection coverage, called GAP insurance, is intended to protect the dealership against the total loss of a vehicle that is being purchased. Where ordinary coverage will pay the car owner for the vehicle, GAP coverage almost always pays directly to the finance company or lender, often without any involvement from the person buying the car at all. Because a vehicle begins to depreciate as soon as it is purchased, the payout amount on an ordinary car insurance policy would not pay for the full cost of the car loan, leaving the purchaser to pay the remainder of the loan out of pocket. GAP insurance is specifically designed to pay the difference in loan value between what is actually left owing and the the depreciated amount paid on the regular policy when the vehicle is totaled.
Because GAP insurance is issued on a specific loan, it cannot be transferred from one vehicle to another. When you sell or trade the original vehicle, the GAP coverage ends, and a new GAP insurance policy will be required for the new vehicle. In some cases, the amount of the GAP policy decreases over time, reflecting the paid amount of the loan and resulting in a policy that slowly fades away as your car is paid off.
GAP insurance is not a complete policy in itself, but is a rider, or supplemental policy, added onto the regular car insurance policy. GAP insurance is not useful unless the car is being financed and the amount of financing is greater than the book value of the vehicle it is taken out on. If you pay cash for a car, for instance, a GAP policy would not serve any useful purpose because it is not intended to pay a benefit to the policyholder, only to the owner of the loan for the car.