You get behind the wheel of your brand-new car and start your first ride home. It’s so new that you haven’t even made the first payment yet. But how can you make sure you have enough insurance coverage? Your regular auto insurance policy provides liability and will pay for damage up to the depreciated value, but what about the difference between the value and what you owe?
Gap insurance is an additional policy that will protect you and your new asset. If you have questions about gap insurance and whether you can get a gap insurance refund when you no longer need the extra coverage, take a look to find the answers.
What Is Gap Insurance?
Gap insurance is optional insurance coverage available to new car buyers and lessees. It helps pay the difference between the depreciated fair market value of your vehicle and what you’re financially responsible for if it’s stolen or totaled.
Gap insurance works along with your collision or comprehensive auto insurance coverage, which will only pay for a stolen or totaled vehicle up to its fair market value. The Insurance Information Institute says that as soon as a new car leaves the car lot, its value depreciates. This leaves a gap between what your insurance company will pay and what you owe for the car.
When Do You Need Gap Insurance?
Although the state does not require you to have gap insurance, some lenders might. Some lease contracts also require that you carry gap insurance. Since lease payments are usually lower than the payments you would make if you purchase a car, the difference between what you owe and how much the car is worth can be significant.
Situations in which you might want to consider gap insurance include the following:
- You make a small down payment on a large loan: A small down payment creates a larger gap between the car’s depreciated value and what you owe.
- You buy a car with a high depreciation rate: Some cars have a higher or faster depreciation rate than others. You can look up your vehicle’s depreciation value online or use a calculator to get the specifics.
- You drive more than 15,000 miles a year: Higher mileage means more wear and tear, which means your vehicle will depreciate more quickly.
- You sign a long-term loan: If you spread out the loan payments over many years, you will have negative equity for a significant time throughout the life of the loan.
Can I Cancel My Gap Insurance Policy?
Since gap insurance is not legally required, you can cancel it at any time. There are a few reasons you might not need the extra insurance anymore.
- You pay off your car loan early
- You’ve paid enough towards the car that you no longer owe more than it’s worth
- You trade in the vehicle
If you’ve come to a point where you no longer need the insurance, you can contact the dealership or your insurance company to cancel it.
Can I Get a Gap Insurance Refund?
The good news is that in some cases, you can get a refund when you cancel your gap insurance. If you pay the premium in full and you pay off your car loan early, you can get a refund for the gap insurance premiums that you didn’t use. The amount you can get back will depend on how long ago you purchased the car.
It’s important to note that if you pay your gap insurance premiums on a monthly basis, you might not get a refund, and if you do, it will most likely be a much smaller amount, since you didn’t pay as much upfront. Also, remember that you’ll need to request a refund for your gap insurance since most companies will not give it to you unless you ask.
Requesting a refund from the dealership takes just a few steps:
- Review your policy to see if the gap insurance premiums are part of your financing.
- Contact the dealership and request the cancellation forms.
- Find out the mileage on your vehicle to make sure it’s within the terms of your lease agreement.
- Contact your insurance company to determine if you can make the request online or if there are paper forms needed.
- Get a payoff letter from the dealership with details of the gap insurance balance.
How Long Will It Take To Get a Gap Insurance Refund?
If the insurance company owes you a refund for your gap insurance premium, it might take some time to get it. After you contact the dealership and the insurance company, you’ll have to wait a few days or a few weeks while they process the paperwork and then issue your refund.
Before you cancel your gap insurance, consider your financial circumstances. If you still owe more than the vehicle is worth, the policy will keep your out-of-pocket expenses down if you get into an accident that totals the car.
If you have made payments for a few years and can pay the loan off early, it’s an unnecessary expense. In this circumstance, canceling the policy means you might get a gap insurance refund. Make sure to check where you are in your payments and keep an eye on your loan so you know when and if you can cancel and get some money back.
When Are You Not Eligible for a Gap Insurance Refund?
There are a few circumstances where you are not eligible to get a refund for your gap insurance. If you are in an accident and the insurance company declares the car a total loss before the expiration date of the gap insurance policy, you won’t get a refund. In this case, the gap insurance will pay for the difference between the amount you owe on the loan and the car’s value. If there are any remaining months of coverage, you will not be able to get a refund.
If you lease a vehicle, you are not eligible for a gap insurance refund. However, some insurers might have guidelines for canceling the insurance policy. Some may offer a full refund if you cancel within the first 60 days but will not give you a refund after that time. Other companies may offer a longer cancellation window.
Getting a brand new car is an exciting time, and gap insurance can give you the peace of mind to fully enjoy the experience. Be sure to read the policy and guidelines before purchasing a gap insurance policy so you know if you will be eligible for a refund.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.