How Much Does Gap Insurance Cost?

A gap insurance policy will cover you if your car gets totaled or stolen. Find out how.

Auto insurance is absolutely necessary because it cushions the financial blow of an accident. No matter how much of a safe driver you are, unfortunate incidents can happen anytime. And fatal accidents are often too common in the United States.

Fatal accidents sometimes result in your car being totaled.

But is your insurance company going to pay you the whole amount of the loss? And what if there is still a debt on your car you owe? This is where gap insurance comes into play.

Let’s sort out the basics and see what can be done.

What is Gap Insurance and what does it cover?

Gap insurance is basically the difference you pay between the amount you owe for a car and its actual cash value in case it gets stolen or ‘totaled’.

What is ‘totaled’?

Totaled is when your car gets so badly damaged in an accident that there is no repair to it OR if the repair costs more than the actual amount you purchased it for. So if your car gets totaled, the insurance company pays the difference between the cash value and the actual purchase amount you owe for the car.

Sounds confusing, right?

An Example

Let me explain with a real life example.

Laura buys a car under her own name for $30,000. But, she owes the financing company around $10,000 worth of additional car payments. Now, if Laura’s car is completely crushed or ‘totaled’ in an accident, the insurance company will pay her $30,000 because of the auto insurance policy.

But she still owes additional $10,000 worth of payments even though she doesn’t even have a car now. What does she do? Where does she get the $10,000 to pay the finance company?

This is where a Gap Insurance Policy comes into play. If Laura has a gap insurance policy, the remaining $10,000 will be covered under this.

What does Gap Insurance cover?

The good thing about gap insurance is that it doesn’t focus on how your car is destroyed. No matter if it’s on the road when a drunk driver hit you or your car got ruined in a flood- whatever the case, you have faced a tremendous amount of loss.

But with the gap insurance policy in force, your insurance company is bound to pay you with the gap and provide you with the financial support you need.

Some examples where a gap insurance will look like a good choice to you, if your vehicle was destroyed by:

  • Road accident
  • Vandalism
  • Terrorism
  • Natural hazard
  • Theft

Whatever the case, you really don’t have to worry about the debt and pending loans

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How does Gap Insurance work?

The only reason why people purchase a gap insurance is when they know that the amount owed is more than the actual value of their car. If that isn’t the case with you, you probably don’t even need a gap insurance policy.

But if you do, here’s how it works.

Now that you know what a gap insurance policy is, you’re interested in how it works. Well, there are certain situations why a gap insurance may come in handy for you:

  • If you have paid less than 20% down payment for your car
  • You bought a car with a bad resale value
  • If your loan is of more than 60 months
  • Your vehicle is on lease
  • Your car travel is a lot of miles in a day (more driving agenda will depreciate the value of your car)

Now if you find yourself in any one of these situations above, you might want to opt for gap insurance. Why? Because there are chances that you won’t be able to fill in the gap yourself and you will need financial assistance.

Let’s say your cat gets totaled or stolen, you will be paid the gap amount by your insurance company and you’re free to buy a new car with the actual cash value paid to you. So with very less hassle, you can actually get your hands on a new vehicle in very less time. And buying a gap insurance is actually very cheap, normally it is $20 for an entire year.

How much does Gap Insurance cost?

If you’re looking for gap insurance as an add-on to your existing auto insurance policy, the overall deal can be fairly cheap for you. For instance, as an option, you can expect to pay only $20 a year if the insurance is already covering comprehensive and collision.

Even though as an optional add-on it is fairly cheap to get gap insurance, sometimes you don’t even need it.

On average, a dealership will charge you a flat rate of $500 to $700 for a gap policy. By contrast, a major insurer will typically price it at 5% to 6% of the collision and comprehensive premiums on your auto insurance policy.

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People usually think buying gap insurance from a car dealer is convenient, but there are specialist firms that will give you better insurance packages. Here are some of those companies, but their packages have certain limitations. Have a look:

Insurer Does it offer gap insurance? Limitations
State Farm Yes Only vehicles financed through State Farm Bank
Progressive Yes Up to 25% of actual cash value (lease/loan coverage)
Allstate Yes New vehicles only
Esurance Yes Up to 25% of actual cash value (lease/loan coverage)
Farmers Yes New vehicles only
Travelers Yes New vehicles only
Nationwide Yes
21st Century Yes Only available in AZ, CO, ID, IA, KY, MT, NM, OR, NE, TN, UT, WA and WI
USAA Yes Only vehicles financed with a USAA auto loan

Note: Sample rates have been extracted online, courtesy of ValuePenguin.

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These insurance companies specialize in designing auto insurance policies along with gap insurance. For some people opting for a gap insurance actually sounds like a smart idea ESPECIALLY when the value of your car is way less than the amount owed.

Can you buy Gap Insurance anytime?

Most people wonder what the best time to go for gap insurance is.

Well, you can buy gap insurance the moment you purchase your car. Why is that? Because if you have a longer plan of repayment (5 years or more), chances are that your car will depreciate faster, which means it will lose it’s value!

It is better if you opt for gap insurance as early as possible to save you from the risk of being a victim of car theft or damage in the near future.

In such a case when your car gets stolen or totaled, the actual value is very less that is paid by the auto insurance company, but if you have gap insurance, you can actually fill in the difference without having to worry about money!

Gap Insurance Cost Calculator

To know how much gap insurance you should have on your car and how much you should owe, you need to have a gap insurance cost calculator.

On average, these are the rates that a driver may have to pay after gap insurance.

Driving Record Annual Rates with Gap Insurance Coverage

Driving Record Average Annual Rates Average Rates With Gap Insurance
Clean Record $3,124 $3,824
With 1 Accident $4,100 $4,800.
With 1 DUI $4,920 $5,620
With 1 Speeding Violation $3,669 $4,369

Note: Sample rates have been extracted online, courtesy of CarInsuranceCalculatorOnline.

Do you get money back from Gap Insurance?

A gap insurance refund is simply the remaining amount being given back to you if you pay all your gap insurance dues and premiums before time.

There are many people who have a secure financial condition and are actually able to pay the amount owed of the vehicle during the first few years. This means that they no longer need a gap insurance policy, so the remaining premiums will be refunded back to you since the gap insurance is usually paid for in advance.

But if your gap insurance isn’t paid in advance and you have decided for an installment option, you won’t be entitled to any refund.

Conclusion

Gap insurance is specifically necessary for people who have:

  • Made a small down payment on a new car, or none at all.
  • Agreed to a loan term longer than 48 months.
  • Drive a lot, which reduces a car’s value more quickly.
  • Lease your car.
  • Bought a car that depreciates faster than average.

If any or all of these conditions apply to you, gap insurance is worth it for you, and having a policy that overall costs you around $20-$40 isn’t a bad deal. A gap insurance policy will provide you coverage if your car gets totaled or is stolen. It’s definitely a good idea to find a proper gap insurance policy, and make sure you never miss a premium payment. Shop around to find the cheapest policy and then stick to it!

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Charles Bains

Charles Bains

Charles Bains started his insurance career as a marketing intern before pounding the pavement as a commercial lines agent in Orlando, FL. As an industry journalist, his articles have appeared in a variety of trade publications. His insurance television career, short-lived but glorious, once saw him serve as the expert adviser on an insurance-themed infomercial (yes, you read that correctly). Having recently worked for various organizations, coupled with his broader insurance knowledge, Charles is able to understand our client’s needs and guide them accordingly. He is a gem for Insurance Noon as his wide area of expertise and experience have been beneficial in conducting further researches to come up with solutions and writing them in a manner which is easy for everyone including beginners to comprehend.

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