GAP insurance, also known as Guaranteed Auto Protection, is an optional yet important addition to your car insurance coverage. GAP insurance helps drivers cover the difference between the amount they owe on an auto loan and their vehicle’s actual cash value (ACV) in the event of a total loss. Because new cars depreciate quickly early on, the amount owed to your lender often exceeds how much insurance companies will pay out for a totaled car. Instead, GAP coverage protects you from being personally liable and covers the total loss of the vehicle.
Furthermore, if a car is paid off in advance of the loan term, a driver is owed a GAP insurance refund. Because GAP insurance is often paid upfront at the dealership or with your lender, a GAP refund may be issued for any unearned portion of the coverage. However, if you pay your GAP coverage in monthly installments, you are not entitled to any refund.
Below, learn more about how a GAP insurance refund works. We’ll also teach you how to calculate your GAP refund or cancel your GAP insurance.
How Does GAP Insurance Work?
The best and simplest way to explain exactly how GAP insurance works is to consider a hypothetical scenario. In it, you have just purchased a new car for $50,000, and you have been driving it for about six months.
Then, one day on your way home, you are involved in an accident, resulting in a significant amount of damage to your car. Later, your insurance company deems your car totaled, which means that even with repairs, the car is no longer safe to drive. At this point, once your insurance company determines that your car is a total loss, you know that the company will give you a check, allowing you to either pay off the value of your auto loan or buy a new car.
Unfortunately, many drivers are surprised when they see that check. Even though you paid $50,000 for your car, and even though it’s only a few months old and you still owe $48,000 on it, your insurance company only gives you $40,000 – which is the actual cash value of the car before it was wrecked. Unfortunately, this amount is not enough to repay the loan or buy the same car in the same model year.
Now, assume for a moment that you also purchased GAP insurance along with full coverage car insurance. After your accident, rather than writing you a check for only $40,000 (the depreciated value of your vehicle), you will get the full $48,000, or the amount you still owe. You will then take a portion of the payout and pay off your auto loan, but the rest should reimburse you for your down payment and car payments.
True to its name, this sort of auto insurance policy is designed to bridge the gap between your car’s depreciated value and the amount you still owe.
How Long Does It Take For GAP Insurance To Pay?
Depending on the circumstances around the total loss, it can take an insurance company up to 30 days to pay out on your GAP insurance coverage. During this time, you will want to regularly follow-up with your agent or representative to check on the process of your claim and provide all paperwork as quickly as possible. It is often best not to give the dealer, lender or your insurer any excuses to prolong payment of your claim.
GAP Insurance Refund After A Total Loss
If you are using your GAP insurance to pay off your lender because of a total loss accident, then you may be wondering if the rest of your GAP coverage premiums may be refundable. Unfortunately, policyholders are not due a GAP insurance refund after a total loss.
GAP Insurance Refund After Payoff
Most drivers don’t know about GAP refunds. You may be eligible for a GAP insurance refund if you pay off your car early. For example, GAP coverage at the dealer or with a lender is paid upfront and in advance. This protection covers you for the term of the loan, until it is paid off.
If a vehicle is financed for 60 months (5 years) but is paid off in 36 months (3 years), 24 months (2 years or 40%) worth of premiums are due back and must be refunded. Similarly, if a car owner sells or refinances the vehicle, a GAP insurance refund is warranted again.
While some lenders will automatically get a notification of your pay off, sale or refinancing and send you a check for the refund, others may not. It is your responsibility to follow up with the finance company to make sure you get your GAP refund.
How To Cancel GAP Insurance
If you want to cancel your GAP insurance, remember that some dealerships or banks may require it for a certain amount of time as part of your loan’s terms. If you cancel it, your monthly payments may skyrocket, or the lender may consider your loan in default. Otherwise, to cancel your GAP insurance, simply call the company providing you with the insurance and request the cancellation.
Most companies will give you a full refund if you cancel within a certain period of time, which is usually between 30 and 90 days. If you cancel after this time has passed, you will instead be eligible only for a refund that has been prorated according to the length of time the policy has been in effect.
On the other hand, if you have completely and successfully paid for your auto loan in full, then you will no longer need GAP car insurance. To cancel it, gather the documents that provide proof your loan was paid off completely and then contact your GAP insurance company to request the cancellation.
How Long Does It Take To Get A GAP Insurance Refund?
Not all insurance providers will automatically send your refund, so you may have to ask them to send it to you. There’s usually a 30-day waiting period before the insurer will mail your check, so you can expect your refund to take about 4 to 6 weeks to arrive.
Who Should Consider GAP Insurance?
GAP insurance is ideal for anyone who owes more on his or her car loan than the vehicle is actually worth. Unless you put a large down payment on your car, you will likely be upside down on your loan the moment you leave the dealership. This is actually quite a common occurrence since automobiles tend to depreciate rather quickly once they leave the lot, even if they’re brand-new.
GAP coverage is designed to cover the difference between the depreciated value of your car and what you actually owe on that car. You might be surprised at the difference; sometimes, it can be several thousand dollars that you would otherwise have to pay out-of-pocket to your lender after a total loss.
How To Buy GAP Insurance
Depending on where you live, you can purchase GAP insurance for your new car in three different ways.
- Bank or Lender – In order to mitigate risk and ensure that you do not default on your loan, some banks may charge you for GAP insurance and add the premium to the total value of your loan. Be aware that banks and finance companies often charge quite a bit more than the best auto insurance companies.
- Dealership – If you financed your car directly through the dealership, there’s a good chance the dealer will also sell you GAP insurance, and they may even require it. Unfortunately, you will likely pay far more for the insurance than if you had purchased it on your own. Dealerships tend to have higher GAP insurance premiums than most carriers or even your bank.
- Your Auto Insurance Company – The absolute best way to add GAP coverage to your existing auto insurance policy is through your current insurer. You’ll only pay about $5 more per month, on average, which is quite affordable, and your insurer will simply add the premium to your existing rate.
If you’re ever debating whether to buy GAP insurance through a dealer or insurance company, always choose to buy it through your own insurer. If the dealer requires you to purchase GAP coverage before leaving the dealership with your vehicle, then cancel the GAP insurance from the dealer after you have proof you’ve added it to your existing policy.
Full Coverage vs. GAP Insurance
If you have traditional full coverage insurance, the check you receive covers your car’s depreciated value, which can be quite a bit lower than the initial purchase price since cars depreciate so very quickly. To put this into perspective, the value of most automobiles drops by 9% to 11% in the very first day after purchase. Unfortunately, without GAP insurance, you would be responsible for paying the difference between the value of your car and what you still owe on your loan.
On the other hand, if you opted to purchase GAP insurance (or if it was included in your insurance policy), you would receive a check for the amount of money you still owe your bank or lender. This is exactly what GAP policies were designed to do; they bridge the gap between your auto’s value and your loan’s value to reduce potential out of pocket costs.
Compare Car Insurance Quotes
If you’re looking to lower your car insurance rates or don’t think you are currently getting the cheapest premiums or best coverage from your current insurer, it may be time to compare quotes online. The best auto insurance companies are always competing for new business, and the only way to know if you are getting a good deal is to shop around.
Just enter your zip code to see other providers in your area and get a free, instant quote. Even if you don’t plan on changing carriers, sometimes having a competing quote from a rival company can encourage your existing provider to give you cheaper rates.