Some car insurance companies offer the purchase of gap insurance. They often add it as an endorsement or rider to your auto policy, or you may find it through a car dealership or finance company. While gap insurance makes good sense for new cars, you can cancel it after your car ages a bit. If you cancel before the end of a policy term, you can request a refund for unused coverage. Learn more about how gap insurance works and how it may impact you.
What Is Gap Insurance?
Guaranteed Auto (or Asset) Protection, commonly called “gap insurance” or “loan/lease gap coverage,” is protection for newer financed and leased vehicles. If your car is stolen or totaled, gap insurance can help pay the difference between the current value of your car and the amount you still owe your lender. Cars depreciate quickly. A new car drops about 20% in value in the first year you own it. Over the next four years, the car will lose roughly 15% of its value each year. If your vehicle is stolen or totaled, the insurer will only pay its actual cash value, which deducts depreciation. For example, if you finance a car for $15,000, and it is totaled after one year, the insurance provider will likely settle for no more than $12,000. That’s because they are factoring in the 20% drop in value. $15,000 minus 20% ($3,000) is $12,000, or the estimated actual cash value of the car after a year’s time. If you still owe more than $12,000, you’re on the hook for anything above that amount. But if you have gap insurance, the coverage can help pay off what’s left on your loan.
Is Gap Insurance Required?
If you lease a car, leasing companies often require you to carry gap insurance. In most cases, it is included in your lease agreement for no added charge. If it’s not, you can buy it as an add-on. Lenders don’t often require gap insurance when you finance a car, but you can sometimes buy the coverage through the lender or the auto dealer. Lenders and car dealers often sell gap insurance for a set premium of $500 to $700. If you buy the coverage from a dealer or lender, though, they may roll it into your loan, adding to the cost. You can often buy the coverage for much less from an auto insurance company—if the firm offers it. Usually, carriers offer gap insurance as a rider or endorsement to auto policies.
What Does Gap Insurance Exclude?
Even if you purchase gap insurance, it won’t cover everything you might owe a lender or leasing company. These other costs can include:
Prior damage, storage, towing, or wear and tear that’s not covered by the insurance payout.Balances carried over from previous leases or loans.Extended warranty costs.Lease security deposits.Penalties for excessive mileage.Late payments.Non-OEM parts added to the car, such as stereo or GPS systems.
When Should You Cancel Your Gap Insurance?
If you add gap insurance to your auto policy, you can cancel it after your loan amount drops below the car’s value. This often happens after about two years of payments. You can also drop gap coverage if you pay off your loan early, or trade or sell the vehicle. If you lease a car, the lease contract may require you to keep the coverage until the end of the term. Likewise, if a lender requires you to buy gap insurance, the finance contract may require you to keep the coverage until you pay off the loan. Consult your lease agreement or loan contract for details. The lease agreement, insurance contract, or your state’s insurance code may determine the gap coverage limit. If you purchase gap insurance from a lender, you may incur an early termination fee when filing a gap coverage claim.
How to Get a Gap Insurance Refund
If you decide to drop gap insurance during a coverage term, you can apply for a refund. The insurer may not notify you that you are due a refund and likely won’t automatically reimburse you. In most cases, you will receive a refund of the amount of your coverage that is unused. Some entities, including Navy Federal Credit Union and Bellwether Community Credit Union, give you the option to refund gap insurance if you do so within a specific time frame. You should be able to get a full refund if you cancel within 30 days after the policy’s start date. The details depend on policy and state laws. Requesting a refund for gap insurance purchased from a car dealership will require following a few steps.
What to Expect When Asking for a Gap Insurance Refund
Once the process is complete, the insurance provider will cancel your policy and issue a refund. You’ll usually get it in the form of a check. The refund process can take a few days, or it may take as long as six weeks.
