What is Gap Insurance for Cars?

Gap insurance is an optional add-on coverage that covers the gap between your car’s actual cash value, and the amount you still owe on your auto loan or lease if your car is totaled or stolen. Additionally, gap insurance also covers your car’s deprecation cost unlike collision, and comprehensive auto insurance.

Typically, the gap insurance coverage is designed to protect you from financial loss when you acquire a car on credit or loan. In general terms, it is commonly abbreviated as gap insurance which stands for guaranteed asset protection insurance. Apart from cars, it also extends to other motor vehicles such as motorcycles, trucks, RVs etc.

How Does Gap Insurance Work in Michigan?

So, how does gap insurance work in Michigan? Gap insurance works in Michigan the same way it works anywhere in the U.S. The gap insurance will pay the remaining loan amount that you owe for financing the car after the actual cash value has been covered by your collision or comprehensive auto insurance.

As gap insurance coverage specifically applies after your collision or comprehensive coverage pays out, that’s why it’s an add-on coverage that requires you have collision or comprehensive auto insurance.

Here’s an example to understand how gap insurance works.

Suppose you purchased a car for $40,000 on loan, and 3 years later it’s now worth $30,000 after depreciation. Recently after a car accident, the car is totaled, and beyond repair. Now your collision or comprehensive auto insurance will cover your car’s ACV (actual cash value) of $30,000.

Regardless of the depreciation, you still owe $10,000 for financing your car on loan. So, how do you pay for that? That’s where gap insurance comes in. Your gap insurance will pay for the remaining $10,000 minus your deductibles. So, if you have a deductible amount of $1,000, the gap insurance will pay the remaining $9,000, and you will have to pay the deductible amount of $1,000 out-of-pocket.

Similarly, you will get covered by your gap insurance the same way after your car gets stolen. After your comprehensive insurance pays your car’s ACV, the remaining amount that you owe for financing your car on loan will be covered by your gap insurance coverage minus your deductibles.

If you’re looking for a reliable insurance agency in Michigan offering different types of auto insurance coverage including collision, comprehensive, and gap insurance, consider checking our insurance solutions. Additionally, you’re willing to consult with our insurance experts in-person, consider visiting our regional offices located in Flint, Saginaw and Mt. Pleasant.

When You Might Need Gap Insurance?

If you’re financing your car on loan, then it’s crucial to ensure that you have gap insurance. No matter how cautiously you drive, you never know when you may suddenly encounter a severe accident which can total your car to the point it’s beyond repair.

Unexpected events such as vandalism, natural disasters, hitting an animal or even car theft can put you at a financial standstill. As the value of your car gradually depreciates with each passing year, so does its actual cost value.

So, without gap insurance you’re at substantial risk of paying hefty out-of-pocket expenses to pay off your financial debt. If you have purchased a car on loan, and if you don’t have gap insurance, here’s why you should consider getting it soon.

Your Car Gets Totaled

Even after your car gets totaled, you will still have to pay the amount you owe on loan. Regardless of the way the accident happened, you will either have to pay the remaining amount you owe out of pocket or through insurance. This is exactly when you need gap insurance, which will cover the remaining amount that you owe excluding deductibles.

Your Car Gets Stolen

Similarly, you will still have to pay the loan for financing your car after it gets stolen. If you have gap insurance, it will cover the remaining amount that you owe. So, with gap insurance you can secure yourself from the financial risk of paying out of pocket to cover the remaining loan amount for your stolen car.

You Made a Small Down Payment or Have a Long Loan Term

The situation can be even more critical if you have a small downpayment, or if the loan is long term. So, in this case if you owe a hefty amount even after depreciation, it can be a severe financial burden which can be very difficult to re-pay out of pocket. However, with your gap insurance you can pay the loan amount up to your coverage limit.

Do Car Insurance Deductibles Apply for Gap Insurance?

Yes, car insurance deductibles apply for gap insurance similar to collision or comprehensive insurance. So, when you claim your gap insurance, if you have any insurance deductible, you will first have to pay that, and after paying your deductibles your gap insurance will cover the remaining amount that you owe up to your coverage limit.

For example, if you’ve car insurance deductibles of $500, and if you owe a remaining amount of $2,000 for financing the car on loan. You will have to pay $500 out of pocket first and then your gap insurance will pay for the remaining $1,500 up to your coverage limit.

Is it Possible to Claim Gap Insurance Without Any Accident or Theft?

Typically, insurance policies have been designed to cover financial loss due to an accident, or unprecedented incidents such as theft. Similarly, the gap insurance policy adheres to the same principles, and that’s why it is not possible to claim gap insurance without any accident or theft.

So, to be clear, you can’t file a claim under gap insurance just because your car’s value has dropped or you want to trade it in. Unless your vehicle is stolen or totaled, your gap coverage won't apply.

Average Cost of Gap Insurance in Michigan

In Michigan the average cost of gap insurance is $149 per year. However, as it’s an add-on insurance coverage, you will have to purchase it within collision and comprehensive auto insurance coverage.

As you cannot purchase gap insurance coverage as standalone coverage, the overall premium of purchasing it with collision and comprehensive coverage can cost you $4,082 annually on average.

Typically, just like any other car insurance coverage, the overall average insurance rate of gap insurance can typically vary from one insurer to another. So, depending on the insurance company you choose to purchase from your overall average premium including the add-on gap insurance can range from $3,168 to $5,764 or more per year.

If you consider the average cost of gap insurance alone, it can range from $103 to $293 per year in Michigan. On the other hand, instead of purchasing directly from an insurance company, if you purchase it via a car dealership, the average cost of the gap insurance premium can be anywhere between $200 and $400 or more per year.

On top of that, if the interest rates for financing your car are considered, then you’re expected to pay even more. If you would like to know more about car insurance rates here’s a guide on how much does auto insurance cost.

Pros and Cons of Having Gap Insurance

Before purchasing gap insurance, it is important to weigh the pros and cons to evaluate whether it’s actually beneficial for you. The following table below includes the pros and cons of having gap insurance.

Alternatives of Gap Insurance

Instead of gap insurance, there are other add-on car insurance coverages that you can consider exploring. Although gap insurance is extremely reliable when it comes to securing your car’s loan repayment even if it’s totaled, or stolen yet there are alternatives that you can consider.

Plus, there are some insurance companies that offer coverage that are like gap insurance but are slightly different. So, depending on the situation, and your insurance needs, here are 3 alternatives of gap insurance as follows.

New Car Insurance Replacement Insurance

The new car replacement insurance coverage replaces your car with the same make and model if it’s totaled or stolen. Even if your car has depreciated, and its actual cash value has significantly fallen you still get a brand-new car equivalent to the purchasing price of your car.

However, you can only get a new car as a replacement for a certain time. While some insurers offer new car replacement for 5 years, there are others that provide it within a timeframe of 1 to 3 years.

In some cases, your insurer may even set a mileage limit of 15,000 or 24,000 miles. If you exceed the mileage, then you can no longer replace your car with a new one after it gets stolen or totaled after an accident.

Better Car Replacement Coverage

Better car replacement coverage replaces your car with a newer model if it gets totaled after an accident or stolen and couldn’t be recovered yet. Regardless of your car’s depreciated value, even if its actual cash value is currently lower than the newer model, you will still get the replacement.

However, if your car’s mileage exceeds over 15,000 miles in the span of 1 to 2 years, then you will no longer receive coverage; meaning you won’t get the newer model of the car as a replacement.

Loan/Lease Payoff Insurance

Loan/lease payoff insurance coverage is quite similar to gap insurance. It also pays for the remaining amount that you owe for financing the car after it’s totaled or stolen. But unlike gap insurance the loan/lease payoff coverage covers up to 25% of your car’s ACV.

In comparison, gap insurance provides better financial protection compared to loan/lease payoff insurance, as gap insurance covers the entire amount that you owe without any limits on your car’s ACV.

So, if your insurer provides loan/lease payoff coverage instead of gap insurance then you can consider it, apart from that gap insurance is still a better choice.

The Bottom Line: Is Gap Insurance Worth It?

Yes, gap insurance is a very essential add-on to your car insurance policy. It pays the remaining amount that you owe for financing a car on loan. Without gap insurance you would have to pay the remaining loan amount out of pocket.

So, with gap insurance the only expense that you need to cover is your deductibles. In case you have no deductible/zero deductibles then you can cover the remaining liability with the gap insurance coverage.

If you’re financing a car on loan, having gap insurance coverage ensures complete financial protection, and that’s why it’s absolutely worth it.

If you're thinking about adding gap insurance to your policy or want to explore your car insurance options, contact us for a free consultation. Our experts are here to help you understand your coverage needs and provide a personalized quote.

FAQs

What is Gap Insurance?

Gap insurance is an optional type of auto insurance coverage which stands for guaranteed asset protection. Gap insurance covers the difference between what you owe and its actual cash value after your vehicle has been totaled or stolen.

What is the purpose of gap insurance?

Gap insurance has been designed to cover any remaining amount that you owe after your car has been deemed a total loss after an accident or it has been stolen and cannot be recovered. After your collision or comprehensive insurance covers your car’s repair or replacement costs, gap insurance covers the remaining amount that you owe even if it exceeds your car’s actual cash value after depreciation.

Does gap insurance cover your down payment?

No, gap insurance does not cover any down payment. It will instantly pay the remaining amount that you owe for financing the car on loan after it’s totaled or stolen upon claiming insurance.

What does gap insurance not pay?

Gap insurance does not cover any amount that is beyond your car’s actual cash value, and the amount that you owe for financing a car on loan. It won’t pay for your deductibles, missed loan payments or any car rental expenses.

Do I need collision or comprehensive auto insurance to purchase gap insurance?

Yes, as gap insurance is an add-on car insurance coverage, you need to have collision and comprehensive auto insurance coverage to purchase gap insurance. Typically, gap insurance pays the additional amount that you still owe after collision or comprehensive insurance pays for your car’s replacement costs up to its actual cash value.