Gap insurance, short for Guaranteed Asset Protection insurance, is an optional auto insurance coverage designed to protect you financially when your car is declared a total loss. This happens if your vehicle is stolen or damaged beyond repair in an accident. A key question for many drivers considering this extra layer of protection is: How Much Is Gap Insurance Per Month? Understanding the costs associated with gap insurance is crucial to determining if it’s the right choice for your needs and budget.
To illustrate, imagine a scenario where your car is unfortunately totaled in an accident. Even with collision coverage, you might face a financial shortfall. Car values depreciate quickly, and the actual cash value (ACV) your insurer assigns to your totaled car might be less than the outstanding balance on your auto loan. For instance, if your car’s ACV is $20,000, but you still owe $25,000, you’re in a $5,000 “gap.” Gap insurance is designed to cover this difference, minus your deductible, preventing you from paying out-of-pocket for a car you can no longer drive. It’s important to clarify that gap insurance doesn’t repay the original purchase price of your vehicle; instead, it addresses the remaining loan balance at the time of a total loss.
Factors Influencing the Monthly Cost of Gap Insurance
Pinpointing an exact monthly cost for gap insurance is challenging because several factors come into play. Insurance providers assess risk and calculate premiums based on a variety of variables. Here are the primary factors that influence how much you’ll pay for gap insurance each month:
- Vehicle’s Actual Cash Value (ACV): The higher the ACV of your vehicle when you purchase the policy, the potentially higher the gap insurance premium might be. This is because a more valuable car might depreciate to a larger degree, increasing the potential gap.
- Loan Amount and Term: The amount you borrowed and the length of your loan significantly impact the need for and cost of gap insurance. Larger loans and longer repayment periods generally mean slower equity accrual, thus a higher chance of a gap and potentially higher premiums.
- Deductible: Just like other types of car insurance, your deductible for gap insurance can influence the premium. A higher deductible might lead to a slightly lower monthly cost, but you’ll pay more out-of-pocket if you make a claim.
- Location: Where you live plays a role in insurance costs across the board. State regulations, accident rates, and theft rates in your area can all affect gap insurance premiums.
- Insurance Provider: Different insurance companies have their own underwriting guidelines and pricing models. This means the cost of gap insurance can vary between providers. It’s always wise to compare quotes from multiple insurers to find the most competitive rate.
- Bundling: Often, bundling gap insurance with your existing auto insurance policy from the same provider can lead to discounts. Many insurers offer reduced rates when you purchase multiple coverages together.
Average Monthly Cost of Gap Insurance
While the exact cost varies, understanding the average price range can give you a good starting point when considering gap insurance. Generally, when purchased as an add-on to your existing car insurance policy, gap insurance is quite affordable. You can typically expect to pay between $2 to $3.33 per month, as insurers often charge an average of $20 to $40 per year for bundled gap coverage.
Purchasing gap insurance independently, such as through a dealership or lender, is usually significantly more expensive. These standalone policies can average between $200 to $300 upfront for the coverage period, which translates to a higher monthly equivalent if you were to spread the cost out.
It’s important to remember that these are average figures. Your actual monthly cost could be higher or lower based on the factors mentioned earlier. Also, keep in mind that the need for gap insurance is often temporary. As you pay down your car loan and build equity, the “gap” shrinks, and you might eventually no longer require this coverage.
Is Gap Insurance Worth the Monthly Cost?
Deciding whether gap insurance is worth the monthly cost is a personal decision based on your financial situation and risk tolerance. However, for many car owners, especially those in specific circumstances, the relatively low monthly premium can offer significant peace of mind and financial protection.
Gap insurance is particularly valuable in the following situations:
- You made a small down payment: A smaller down payment means you finance a larger portion of the car’s value, and it takes longer to build equity. This increases the risk of being “upside down” on your loan.
- You financed for a long term: Longer loan terms mean slower equity buildup, extending the period where you could owe more than your car is worth.
- You purchased a vehicle that depreciates quickly: Some car models depreciate faster than others. If you’ve bought a car known for rapid depreciation, gap insurance might be a wise consideration.
- You rolled over negative equity from a previous loan: If you included the outstanding balance of a previous car loan into your new car loan, you start with negative equity, making gap insurance even more relevant.
- Your lender or lease requires it: Many lease agreements and some auto loans mandate gap insurance to protect the lender’s investment.
Even if you are a cautious driver, accidents happen, and theft is a reality. Without gap insurance, being “upside down” on your car loan after a total loss could mean you are responsible for thousands of dollars out-of-pocket, even after your standard collision or comprehensive insurance pays out. For a few dollars a month, gap insurance can prevent this potentially significant financial burden.
Where to Get Gap Insurance and Potentially Save
When it comes to purchasing gap insurance, you have a few options. As mentioned earlier, dealerships and lenders often offer gap insurance, but it is typically more expensive than getting it through an insurance company.
Insurance Companies: Purchasing gap insurance as an add-on to your existing car insurance policy from a reputable insurance company is generally the most cost-effective route. You can often get a quote online or through an agent and compare prices from different insurers. Bundling your gap coverage with your main auto policy can also unlock discounts.
Dealerships and Lenders: While convenient, gap insurance from dealerships and lenders tends to have higher premiums. They may roll the cost into your financing, making it seem less noticeable, but it ultimately adds to your overall expense.
To potentially save money on gap insurance, consider these tips:
- Compare quotes: Always get quotes from multiple insurance companies to find the best rate for gap coverage.
- Bundle policies: If you already have car insurance, inquire about adding gap insurance to your existing policy for potential discounts.
- Review coverage periodically: As you pay down your loan and your car’s value changes, reassess if you still need gap insurance. You can cancel it when the gap between your loan balance and the car’s ACV is closed.
In conclusion, understanding how much gap insurance costs per month is only part of the equation. Evaluating the value it provides in protecting you from potential financial loss is equally important. For a relatively small monthly expense, gap insurance can offer substantial financial security, especially for those who are at a higher risk of being upside down on their car loan. If you are financing a new or used vehicle, exploring gap insurance and comparing quotes is a prudent step in responsible financial planning.
[1] https://www.caranddriver.com/car-insurance/a36534152/how-much-is-gap-insurance/, Accessed February 2022.
