You never know if your car will get stolen or totaled. While either of these scenarios would be unfortunate, the lender or car dealership will still want their money. A car insurance policy will cover the car’s value, but cars depreciate every year. This depreciation can result in a gap between the car’s value and the remaining balance on your loan. For example, if your car is now worth $25,000, but you have a $30,000 loan, you have a $5,000 gap.
Gap insurance covers this difference in case something bad happens to your vehicle. You pay a premium to add an extra level of safety, but after paying off your loan, you no longer need this protection. Depending on when you pay off your auto loan, you can qualify for a gap insurance refund.
What is a Gap Insurance Refund?
A gap insurance refund is the money you receive from unused months of your insurance policy. Many insurance holders make annual payments for their policies. However, some borrowers fully repay the loan halfway into the year and no longer need the gap insurance.
The gap insurance applied for the first six months since you still took advantage of that protection. However, you don’t have to pay gap insurance for the remaining six months if you no longer have a loan balance. You can request a refund since gap insurance no longer applies and receive a prorated premium based on how many months you didn’t use. A gap insurance refund lowers the cost of owning a vehicle. You can also lower your cost with an auto loan refinance and other strategies.
How Do Gap Insurance Refunds Work?
Gap insurance refunds let you tap into premium payments from unused months. Unfortunately, you won’t get a refund on the insurance premiums you paid when there is a gap between your car’s value and the loan’s balance. Instead, you will have to contact your insurance company after fully paying off the loan to receive your refund.
Some borrowers also get a gap insurance refund by switching to a different insurer or canceling gap insurance altogether if they can. However, if you do this, you will only get refunded a prorated premium based on the time you did not use instead of every premium payment to date.
When To Cancel Your Gap Insurance and Get a Refund
Are you wondering if now is a good time to cancel your gap insurance? These are some optimal times to cancel the policy.
You’re Leasing, Selling, or Trading Your Car
When you lease, sell, or trade your vehicle, you won’t own it for long. It doesn’t make sense to continue paying for gap insurance when the keys will soon swap hands. You can cancel the remaining months on your gap insurance policy after the car leaves your possession. There’s no reason to continue making premium payments when you no longer own the vehicle.
If you want to keep your vehicle and lower your costs, you can opt for a vehicle refinance loan. This loan can reduce your monthly payments and even provide you with some extra cash. Some people also use auto refinance loans to capitalize on lower interest rates.
You’re Paying Off Your Car Loan
Gap insurance is only valuable if a gap exists. However, if you pay your loan on time and cut it down sooner, the gap will get narrower and soon not exist. Therefore, a narrow gap may not justify gap insurance, especially if you can use available premiums to close the gap between the loan amount and your car’s value.
You’re Switching to a Different Gap Insurance Provider
Some drivers get frustrated with their insurance provider or prefer a cheaper solution. Make sure you request a refund during the process of making the switch. You don’t want to end up paying for two insurance policies when you will only use one of them if something happens to your vehicle. You may also need to get an insurer that covers basic car insurance if the same insurer handles all of your policies.
If the Loan Amount Left Is Less Than Your Car’s Current Worth
In this scenario, you do not have a gap between your loan and the car’s value. The insurance policy would offer no additional protections and is a waste of money. Get the refund, and use the proceeds to trim down your loan further.
How Much Can You Get?
Requesting a gap insurance refund can help you save money. These factors influence how much you can get.
Value of the Car
A more valuable car will result in higher premiums. You might need gap insurance if you get a lease from a dealer. If you buy the vehicle after your lease, you will no longer need the gap insurance and can get a refund on the remaining premiums.
Loan Amount
A high loan amount will create a wider gap in the future. As a result, insurers may charge higher premiums to compensate for higher loan amounts, but it also increases your refund amount.
Car’s Mileage
A car with less mileage is more valuable and reduces the insurer’s risk, resulting in lower premiums. You won’t get as much money back during a refund, but you will also pay less per month.
Loan Repayment Period
The sooner you repay the loan, the more money you will receive from a gap insurance refund. Paying the loan back in 12 months instead of 18 months gives you an extra six months of premium refunds.
How Refund Amounts Are Calculated
Car and motorcycle owners seeking to save money can calculate their gap insurance refund by reviewing how far they paid in advance and how much remains on the loan.
Pro-Rata Basis Calculation
If you take out a 24-month loan and pay it off in 20 months, you can receive a gap insurance refund equal to four monthly premium payments.
You can take the advance payment and calculate the average monthly premium to determine the refund amount.
Remaining Loan/Lease Duration
If you pay off your car loan early or terminate your lease, your refund will be calculated based on the months left in your original agreement.
For example, if you had a 48-month loan but paid it off in 24 months, you would receive a refund for the remaining 24 months’ worth of premiums.
Administrative Fees and Deductions
Administrative fees and deductions can reduce the total refund you receive. Some insurance companies charge a processing fee for canceling the policy, and this amount is deducted from your refund.
In addition, any claims filed against the policy might impact the refund amount. Always check with your insurance provider to understand the full breakdown of these potential fees.
Eligibility for a Gap Insurance Refund
Criteria for Refund Eligibility
You must meet certain conditions to qualify for a GAP insurance refund. First, you need to have paid for your GAP insurance coverage in advance. If you financed your vehicle with a loan, the amount might have been included in the loan.
You must also cancel your GAP insurance policy before it expires. Most policies allow for a pro-rata refund, meaning you get a refund for the unused portion of the coverage. To start the cancellation process, you should contact your insurance provider and inform them of your decision to cancel the coverage.
Most importantly, be sure to have the documentation needed to request a refund. This often includes your policy number and proof of payoff if your vehicle loan is fully paid.
Time Frame for Refund Requests
Act early if you want a refund on your GAP coverage. The sooner you cancel, the more money you can get back. Most insurance companies have specific periods during which you can request a refund.
For many providers, you can get a full refund if you cancel within a short window, usually 30 to 60 days from the purchase date. After this initial period, you may still get a refund, but it will be on a pro-rata basis. This means the refund amount will depend on how long you’ve had the policy and how much of the policy term is left.
Also, keep track of any deadlines specified by your insurance company. Missing these deadlines may result in not getting any refund at all. Always check the terms and conditions of your policy to understand the exact time frame for making a refund request.
How to Get a Gap Insurance Refund
A Gap insurance refund provides you with extra cash, but not every insurance company will automatically provide you with a refund. Follow these steps to get the money you deserve.
Prepare the Necessary Requirements
You will have to approach your insurer with several documents demonstrating your loan has been paid off or you intend to switch to another insurance company. Here are some documents you will need:
- Verified odometer reading
- Vehicle purchase agreement
- Loan payoff letter (if applicable)
- Information about your new insurer (if applicable)
Contact Your Agent or Insurance Provider
Inform your insurance company that you want a refund on the remaining gap insurance premiums. The agent or provider will guide you through the process.
Fill Out the Paperwork for Cancellation
The insurer will provide you with paperwork to fill out and verify the cancellation. You will have to complete this on your own.
Submit To Your Insurance Provider
After completing the paperwork, send the documents to your insurance provider. They will handle everything on the backend and provide your refund.
How Long Before You Get Your Gap Insurance Refund?
Most insurance companies will give you a full refund within a few weeks, but you should ask your agent for an estimated timeline. Having this information will help you know when to follow up if you believe it’s taking longer than it should to receive your gap insurance refund.
Potential Obstacles and Solutions
Denial of Refund Request
This situation can be frustrating, but don’t throw in the towel just yet. Instead, review your policy documents to confirm you’re indeed eligible for a refund. Once you’ve done so, clearly communicate the issue with the insurance company and escalate the case to management if needed. If the insurance provider still won’t cooperate, consider reaching out to a consumer protection agency.
Disputes Over Refund Amount
Another common issue is disagreements over the refund amount, where the refund received is less than expected. This can occur due to misunderstandings or miscalculations by the insurance provider.
To resolve this, understand the pro-rata calculations used by the provider and keep records of your payments and policy terms. Request a detailed calculation from the insurance company to verify the refund amount. If discrepancies persist, negotiating with your insurance provider or seeking legal advice may help resolve the issue.
Alternatives if a Refund is Not Possible
Transferring Gap Insurance to a New Vehicle
You may have the option to transfer your existing policy to a new vehicle. Reach out to your insurance provider to determine if the policy is transferable and if any processing fees apply.
Selling Your Policy
This option is a bit uncommon, but you may be able to sell your policy if your insurance provider permits this practice. You’ll need to reach out to learn more about the transfer process and the criteria the buyer must meet for approval.
Claiming a Partial Refund
There’s also a chance you could be eligible for a partial refund, even if a full one isn’t an option. Compute the unused portion of your policy and contact your insurance provider to request a prorated refund.
Is a Gap Insurance Refund for You?
A gap insurance refund applies to borrowers who pay premiums in advance instead of making monthly payments. You will no longer have the protection to cover the difference between your car’s value and the loan’s balance, but not everyone needs or wants that protection. Some car dealerships will require you to pay gap insurance, but you don’t need this policy if you get an auto loan. Some people ask for a refund even when they still have a gap to avoid paying any extra for a policy they may never use.
Ensure that you get the best possible insurance option for your needs by having the ability to compare rates all in one place. This will also save you a lot of time since you’re not going to multiple sites or filling out numerous forms. By having the most suitable auto insurance right from the start, you can get potential savings by finding the best rate or at least a lower one than your current policy. Get peace of mind by using Experian’s Auto Insurance Marketplace to find the best deals. Sign up for a free Experian account to get started.
