Getting into a car accident or discovering your car has been stolen is stressful enough. The last thing you want to worry about is owing money on a car you can no longer drive. This is where Gap Insurance, or Guaranteed Asset Protection insurance, can be a financial lifesaver. But the burning question for most car owners is: How Much Is Gap Insurance and is it worth the added expense?
Gap insurance is an optional auto insurance coverage designed to bridge the “gap” between what you still owe on your car loan and your vehicle’s actual cash value (ACV) if it’s declared a total loss after a covered event, like an accident or theft.
Let’s illustrate with an example. Imagine your car, just a few years old, is totaled in an accident. Your collision coverage will pay out the car’s current market value, let’s say $20,000. However, you still owe $25,000 on your loan. Without gap insurance, you’d be responsible for that $5,000 difference out of pocket, even though you no longer have the car. Gap insurance steps in to potentially cover this “gap,” minus your deductible, preventing you from being financially burdened by a loan on a vehicle you can no longer use.
Understanding the Cost of Gap Insurance
Now, let’s get to the core question: how much does gap insurance cost? The price of gap insurance isn’t fixed; it varies based on several factors. Understanding these factors can help you estimate your potential costs and determine if it fits within your budget.
Here are key elements that influence gap insurance cost:
- Vehicle’s Actual Cash Value (ACV): The higher your car’s ACV, the potentially lower the gap, and thus, possibly lower gap insurance costs. However, newer cars that depreciate quickly might have a larger potential gap in the early years of ownership.
- Outstanding Loan Balance: The larger the difference between your loan balance and your car’s ACV (the “gap”), the more gap insurance might cost as it covers a larger potential financial risk for the insurer.
- Your Age: Statistically, younger drivers are sometimes considered higher risk, which could slightly influence the cost of various insurance coverages, including gap insurance.
- Location: Your state of residence can impact insurance costs due to varying regulations, accident rates, and repair costs.
- Claims History: While gap insurance cost isn’t as directly tied to your driving record as your primary auto insurance premiums, a history of multiple claims might have a marginal effect on overall insurance costs.
Average Gap Insurance Costs:
While individual rates differ, you can expect to pay, on average, between $20 to $40 per year if you add gap insurance to your existing car insurance policy. Purchasing gap insurance independently, such as through a dealership or lender, can be significantly more expensive, ranging from $200 to $300 annually. Bundling gap insurance with your current auto insurance provider is almost always the more cost-effective option.
It’s also important to note that the cost of gap insurance for a used car might differ from that of a new car. Used cars generally depreciate at a slower rate than new vehicles, potentially leading to a smaller initial gap and possibly different pricing structures.
Is Gap Insurance Worth the Investment?
Knowing how much gap insurance is, the next logical question is: is gap insurance worth it? The value of gap insurance hinges on your individual financial situation and risk tolerance.
Gap insurance is generally a worthwhile investment for drivers who:
- Made a Small Down Payment: If you financed most of the car’s purchase price, you’ll likely have a larger loan balance compared to the car’s depreciating value, making gap insurance more relevant.
- Have a Loan Term of 5 Years or Longer: Longer loan terms mean you’ll take longer to build equity in your vehicle, increasing the period where you might owe more than it’s worth.
- Leased a Vehicle: Leases often require gap insurance as the leasing company technically owns the car and wants to protect its investment. Even if not explicitly required, it’s highly advisable for lessees.
- Drove a Car That Depreciates Quickly: Certain car models depreciate faster than others. If you own a vehicle known for rapid depreciation, the “gap” can widen quickly.
- Rolled Over Negative Equity from a Previous Loan: If you included the remaining balance of a previous car loan into your new car loan, you start with negative equity, making gap insurance very beneficial.
You likely don’t need gap insurance if you:
- Paid a Large Down Payment (20% or More): A substantial down payment significantly reduces the initial gap.
- Have a Short Loan Term: Rapidly paying off your loan minimizes the time you’re “upside down.”
- Own Your Car Outright: If you don’t have a car loan, there’s no “gap” to cover.
- Owe Less Than the Car’s ACV: If your loan balance is lower than your car’s market value, gap insurance isn’t necessary.
Where to Purchase Gap Insurance and Potentially Save
You have several options when buying gap insurance, and where you purchase it can influence the overall cost.
- Your Auto Insurance Company: Adding gap insurance to your existing auto policy is typically the most affordable route. Insurers often offer it as an add-on coverage for a relatively small annual premium.
- Dealerships: Dealerships usually offer gap insurance as part of their financing packages. While convenient, dealership gap insurance is often marked up and more expensive than buying it through an insurer.
- Lenders: Banks and credit unions might also offer gap insurance when you secure a car loan. Similar to dealerships, lender-provided gap insurance can be pricier.
To potentially save on gap insurance:
- Bundle with your existing auto insurance: This is almost always the cheapest option.
- Shop around and compare quotes: Even within insurance companies, prices can vary slightly. Get quotes from a few providers.
- Re-evaluate your need for gap insurance over time: As you pay down your loan and your car’s ACV approaches or exceeds your loan balance, you can cancel gap insurance coverage.
Gap Insurance Coverage: Beyond Accidents
It’s important to clarify what gap insurance covers and what it doesn’t. As mentioned, gap insurance covers theft. If your car is stolen and not recovered, it’s treated as a total loss, and gap insurance will function the same way it would in an accident, covering the “gap” after your comprehensive insurance pays out the ACV.
However, gap insurance typically does NOT cover:
- Vehicle Repairs: Gap insurance is not a substitute for collision or comprehensive coverage. It only applies when the vehicle is a total loss.
- Mechanical Failures: Gap insurance won’t cover engine trouble or other mechanical breakdowns.
- Wear and Tear: Normal vehicle depreciation and wear are not covered.
- Personal Property: Items inside the car, like electronics or personal belongings, are not covered by gap insurance.
- Injuries or Medical Bills: Gap insurance doesn’t cover bodily injuries. That’s covered by liability and medical payments coverage.
- Loan Default: If your car is repossessed due to failure to make loan payments, gap insurance won’t apply.
- Negative Equity Rollover (in some cases): Some gap insurance policies may not cover negative equity rolled over from a previous loan; it’s crucial to check policy specifics.
In conclusion, understanding how much gap insurance is and how it works is crucial for making informed decisions about protecting your finances when financing or leasing a vehicle. While it’s an additional cost, for many drivers, especially those with new cars, small down payments, or longer loan terms, gap insurance offers valuable peace of mind and financial security against unexpected total loss events. Consider getting a quote from your auto insurance provider to see if gap insurance is the right choice for you.
[1] https://www.caranddriver.com/car-insurance/a36534152/how-much-is-gap-insurance/, Accessed February 2022.
