How Much Is Gap Insurance, and Do You Need It?

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How much is gap insurance: woman filling-out some insurance forms

As any excited new car owner knows, your vehicle starts to depreciate the moment you drive it out of the dealership. It’s also immediately at risk of being totaled or stolen — 810,400 vehicles were stolen in the United States in 2020 alone (per the Insurance Information Institute)! To protect your investment, look into a key detail on your auto insurance policy: gap insurance

So, how much is gap insurance, and what kind of protection does it provide? In this guide, we’ll answer these questions as well as how it works, what it covers, and what it does not cover.

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What is Gap Insurance?

Short for Guaranteed Asset Protection insurance, gap insurance covers the car owner from a total loss that isn’t fully reimbursed by their traditional policy. It offers a payout for the difference between your loan amount and the amount your car is worth, protecting your financed or leased vehicle from depreciation.

How Much Is Gap Insurance?

How much is gap insurance: person talking to an agent

Gap insurance can be purchased in three ways — through your auto insurance company, gap insurance provider, or your car dealership/finance company.

Reputable auto insurance companies like Liberty Mutual and Nationwide make gap insurance an optional add-on to your existing car insurance policy. Adding gap insurance to your policy could cost as little as $5 a month, which is OK to keep paying until you owe less than the value of your vehicle.

You may buy gap insurance as a standalone policy through a dedicated gap insurance provider, car insurance companies, or a dealership/finance company. However, we highly advise purchasing gap insurance through a dealership or finance company as a last resort, as it can be very costly. They typically charge lump sums from $400 to $700 per year, added to your auto loan and accruing interest over time.

How Does Gap Insurance Work?

Gap insurance policies are simple to understand.

Pretend you are financing $50,000 for a new Audi S3. For 36 months, you’ve made all of your payments on time. Standard depreciation dropped the vehicle’s value to $31,000, but you owe $34,000 on your loan, accounting for a $3,000 gap, not including your deductible. If your car gets stolen or totaled, your insurance will pay you $32,000, or the total value of your loan owed minus your deductible.

Without gap insurance, your insurer would only pay out the amount your vehicle is worth ($31,000), not the amount you owe on your loan ($34,000).

Who Should Buy Gap Insurance?

Woman happily driving a car

We highly recommend purchasing gap insurance if you lease your vehicle, put down a small down payment on your car (<20%), plan to finance for 60+ months, or own a car with a very high depreciation rate. Usually, luxury vehicles have higher depreciation rates than cheaper vehicles. Dealerships and finance companies may require it as well. 

To determine if you need gap insurance, consider the following example. You finance a 2017 Acura RLX, which is now worth $36,000. You owe $48,000 on the vehicle. If your car is stolen or totaled, you will continue to pay an egregious amount. It would therefore make sense to get gap insurance coverage.

Note: You can only purchase gap insurance within three years of buying a new vehicle on a vehicle no more than two to three years old.

How Is Gap Insurance Calculated?

The cost of a gap insurance premium is calculated based on the value of the car, your vehicle’s depreciation rate, and loan amount. Don’t expect gap insurance for a Honda Civic to cost the same as a Mercedes GLC300. Gap insurance for longer loans (60+ months) generally commands higher premiums than smaller loans.

What Doesn’t Gap Insurance Cover?

Gap insurance does not cover the following expenses:

  • High mileage penalties
  • Repairs to your vehicle
  • Auto insurance deductibles
  • Car payments due to financial hardship
  • Security deposits and extended warranties
  • Down payments for a new car replacement
  • Extended warranties added to a vehicle loan
  • Rental car reimbursement due to vehicle damage
  • Late charges on your lease or car loan, including carryover balances from previous leases and loans

Is Gap Insurance The Same as Comprehensive Insurance?

Gap insurance and comprehensive insurance cover losses due to non-collisions, including theft, fire, and vandalism. However, comprehensive coverage pays out claims based on your vehicle’s fair value, which deducts the vehicle’s depreciation. Gap insurance covers what you owe on any car loan, including the value of depreciation.

What Is Your Car’s Actual Cash Value?

Your vehicle’s actual cash value is the amount your car is worth, or the value of your car minus depreciation. For example, if your car cost $25,000 when you purchased it and it has depreciated by 15%, the actual cash value is $21,250. 

Generally, the longer your vehicle is in your possession, the more it depreciates. If a new car with a high depreciation rate is stolen or totaled in a severe car accident, you may owe more than your vehicle’s actual cash value, making gap insurance a necessity.

Can I Cancel Gap Insurance After the First Year?

You can cancel gap insurance at any time. We like this condition, as we recommend removing gap coverage when your auto loan is worth more than you owe.

Read your auto insurance provider‘s terms and conditions to learn termination fees and refund methods. Of course, you are also free to shop around and sign up for a cheaper gap insurance policy. Just be sure to cancel your old gap insurance policy before buying a new one.

Is Gap Insurance Worth It?

Agent asking a person to sign a form

Yes, gap insurance is worth it for people who lease or finance their vehicles, where a loan balance is paid above the value of your car. If you don’t want to spend a lot for a vehicle that’s no longer drivable or in your possession, gap insurance is the way to go.

Which Vehicles Have the Lowest and Highest Depreciation Rates?

According to automotive research firm iSeeCars.com, the five vehicles with the lowest depreciation rates are the Jeep Wrangler Unlimited (9.2%), Jeep Wrangler (10.5%), Porsche 911 (12.8%), Toyota Tacoma (13.8%), and the Toyota Tundra (19.5%)

The five vehicles with the highest depreciation rate are the Nissan LEAF (65.1%), BMW i3 (63.1%), BMW 7 Series (61.5%), Maserati Ghibli (61.3%), and the BMW X5 (60.3%)

These depreciation rates are based on an analysis of more than 800,000 2016 model-year vehicles.

Remember, the higher the depreciation rate and the longer the financing term, the more likely you will benefit from a standalone gap insurance policy or add-on gap insurance coverage to your existing policy.

Shop Around for the Best Car Insurance Rates

If you are leasing your vehicle or have a long financing term (60+ months), it may be time to shop for an auto insurance provider offering gap insurance. Comparing rates from different insurance companies is a great way to find the cheapest car insurance for you and your family. See all quotes in one place with Compare.com — it only takes a few minutes.

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