Insurance After A Break: What To Do

Gap insurance, or guaranteed auto protection, is an optional form of insurance that covers the difference between the actual cash value of a car and the amount still owed on the loan in the event of a total loss. This type of insurance is useful for those who have a large car loan or a vehicle that depreciates quickly in value. Gap insurance can be purchased from car insurance companies, banks, credit unions, or car dealerships, although it is typically more expensive through dealerships. It is important to note that gap insurance does not cover all scenarios, such as engine failure, transmission failure, or death. Additionally, it is not required by any insurer or state, but some leasing companies may mandate it. When considering whether to purchase gap insurance, it is essential to weigh the costs and benefits based on individual circumstances.

When to get gap insurance

Gap insurance is an optional, additional coverage that can help certain drivers cover the difference between the financed amount owed on their car and the car's actual cash value (ACV) in the event of a total loss. This type of insurance is beneficial for those who have recently leased or purchased a new vehicle and hold the original loan or lease. It is also useful if your vehicle is stolen and not recovered.

• You owe more on your car loan than the car is worth: If you are currently making car loan payments, calculate the loan balance and weigh it against your car's current cash value. If there is a gap, you should strongly consider gap insurance.
• Your car loan or lease agreement requires gap insurance: Some loan and lease providers may require gap insurance from the outset, especially if you have a long payoff period or have leased a vehicle.
• You have a new car with a substantial loan amount: New cars can depreciate quickly, and if you have a large loan amount, gap insurance can provide financial protection in the event of a total loss.
• You live in a state where gap insurance is not required but beneficial: While not a legal requirement in all states, gap insurance is often considered a smart choice for those financing or leasing a new vehicle. Check with your state's regulations and your insurance agent to see if it is recommended or required where you live.
• You have a long loan term: Longer loan terms mean you will be paying down the principal more slowly, increasing the period during which you might owe more than the car's value.
• You have rolled over old loans: If you have rolled over any outstanding balance from an old car loan into a new loan, you may instantly create negative equity in your new vehicle.
• You have a high-interest loan: With a high-interest loan, a larger portion of your monthly payment goes towards interest rather than reducing the principal balance. This can lead to a slower reduction in the amount you owe compared to the car's depreciation.

When to cancel gap insurance

Gap insurance is an optional form of financial protection that covers the difference between the current market value of your car and the amount you still owe on a loan or lease. It is designed to protect your finances in the event of a total loss, whether due to an accident or theft. While gap insurance can provide valuable peace of mind, there may come a time when you no longer need or want it. Here are some scenarios that may indicate it's time to cancel your gap insurance:

• Your loan amount drops below the car's value: This typically happens after a few years of payments. As your car gets older, the gap between its market value and your loan amount narrows. Once your loan balance is less than the car's actual cash value, you may no longer need gap insurance.
• You pay off your loan early: If you manage to pay off your car loan ahead of schedule, congratulations! You no longer need to worry about owing more than your car is worth, and you can consider cancelling your gap insurance.
• You trade or sell the vehicle: If you decide to part ways with your car, whether through a trade-in or private sale, you can cancel your gap insurance. It is recommended to wait until the sale or trade is completed before cancelling the policy.
• You no longer feel it is necessary: Over time, your financial situation or risk tolerance may change. If you simply feel that gap insurance is no longer necessary for your vehicle, you can choose to cancel the policy at any time.
• You want to switch providers: If you find a better deal or prefer the services of another gap insurance provider, you can cancel your current policy and switch to a new one. Just be sure to have the new policy in place before cancelling the old one to avoid any lapse in coverage.
• You paid too much for coverage: If you feel that you are overpaying for your current gap insurance policy, shopping around for a more affordable option may be a good idea. You can then cancel your existing policy and switch to a more cost-effective provider.
• You need to lower your insurance premiums: If you are looking to cut costs and reduce your overall insurance expenses, cancelling your gap insurance could be one way to achieve that goal.

It's important to remember that gap insurance is not mandatory, and you have the flexibility to cancel it at any time. However, before making any decisions, be sure to review the terms and conditions of your policy, including any cancellation fees or restrictions. Additionally, if you have a car loan or lease agreement, consult your contract to ensure you are not required to maintain gap insurance for a specified period.

How to cancel gap insurance

Cancelling your gap insurance is a straightforward process, but there are a few things to consider before you do so. Firstly, check the terms and conditions of your policy. There may be a cancellation fee, even if you cancel within the first few days of purchasing the policy. Some insurers will charge up to 50% of your premium if you cancel within 60 days, while others may charge 25% or nothing at all. Secondly, consider whether you will have any gaps in your coverage if you cancel. If you still owe money on your vehicle, cancelling your gap insurance policy could leave a gap between the balance owed and what insurance would pay out if the vehicle was written off or stolen.

If you decide to go ahead and cancel your gap insurance, you can do so by contacting your insurer. They will be able to provide you with a form to fill out to cancel your policy and refund any remaining money. You can also cancel by submitting a written request, which should include your name, address, and vehicle identification number (VIN). If you received coverage through an insurance company, you may be able to cancel online.

If you are entitled to a refund, contact your provider to request your money back. It may take some time for your request to be processed and for any paperwork to be sent out, so be prepared to wait. If you are requesting an online payment, make sure you get an email confirmation with details of the transaction and the total amount refunded. Keep all relevant documentation, including policy numbers, cancellation letters, and email notifications.

How to get a refund for gap insurance

Gap insurance covers the difference between the actual cash value (ACV) of your car and the amount you still owe on your lease or loan. If your car is stolen or written off before you finish paying off your loan or lease, gap insurance will cover the difference.

You can get a refund on your gap insurance if you paid upfront for your coverage and cancel the policy early. Gap insurance refunds are most commonly issued after a loan is paid off early, or the car is sold or traded in.

• Paying off your loan: If you pay off your car loan early, you are eligible for a partial refund for the GAP coverage that you haven’t used yet. This is because you’ve already used a portion of your GAP insurance policy while your loan was still active.
• Switching insurance companies: If you switch to a different insurance company, you can cancel your original policy and get a refund for the cancelled coverage you didn’t use. If you cancel within 30 days of the policy start date, you can get a full refund (including GAP insurance costs). If you cancel after 30 days, your refund will be prorated.
• Selling or trading your car: If you sell or trade a car that you’ve bought GAP insurance for, you can get a refund on the amount of coverage you didn’t use. Make sure you wait to cancel your insurance until the car is legally sold or traded.

When you can't get a refund:

• If your car is declared a total loss and your GAP policy pays out the difference between the car’s value and your loan balance, you won’t be eligible for a refund for the remaining months of coverage.
• If your policy has expired, you can't get a refund.
• If your vehicle is stolen or written off and you file a GAP insurance claim, you can't get a refund.

How to get a refund:

• Contact your insurance provider and ask them to cancel your GAP insurance and issue a refund for unused coverage.
• Provide any information and documents that your insurance company requests, such as proof that your vehicle was sold, traded or paid off, and verification of your car’s current mileage.
• Fill out and submit any documentation or forms your insurance company requires to complete the cancellation.

The typical gap insurance refund payout is within 30 days, but it can vary by company and state regulations. It can take at least a few weeks as refunds involve paperwork.

Calculating your refund:

The refund amount you may be eligible for will depend on the cost of your gap insurance premium and how long is left on your current policy. Most policies cover 12 months and are paid annually. If you paid $1,000 for a policy valid for 36 months, your gap insurance monthly payments would be about $27. If you repay your vehicle loan in full after 20 months, you’ll get a refund from your gap insurance provider for the 16 months remaining in the policy term, which is roughly $444.

Gap insurance alternatives

Gap insurance is a standalone policy that covers the difference between the price you paid for your vehicle and its current market value. While it is not an essential type of insurance, it can provide peace of mind if you know that you would want to buy a brand-new replacement if your car was written off. Here are some alternatives to consider:

New car replacement cover

Most fully comprehensive car insurance policies offer new car replacement cover for the first 12 months, and sometimes even up to 24 months, for new cars. This means that if your new car is written off or stolen, your insurer will provide a like-for-like replacement. If you are happy with a replacement car that is not brand new, then gap insurance may not be necessary for you.

Consider the age of your car

Gap insurance is typically associated with new cars because they depreciate much faster than used vehicles. If your car is less than a year old and you have comprehensive insurance, you may not need gap insurance. Additionally, if you have a used car, gap insurance may not be as useful since it won't lose value at the same rate as a new car.

Weigh the cost

Gap insurance might not be worth it if you can afford to cover the difference between the current value of your car and its original value, or what is left to pay on finance. Consider whether you could afford to make up for any shortfall without the need for gap insurance.

Check your finance agreement

If you are using a finance agreement that covers the difference between the 'book price' (official value of the car) and how much you paid, you may not need gap insurance. Some finance agreements already include coverage for the difference between the purchase price and the payout you would receive from your insurance company in the event of a total loss.

Shop around for the best deals

If you decide that gap insurance is right for you, remember that you don't have to purchase it from a car dealer. It is often cheaper to buy it elsewhere, such as directly from insurers, brokers, or via comparison sites. Shopping around can help you find the most cost-effective option.

Frequently asked questions