The main benefits of gap insurance are that it can prevent drivers from owing money to a lender or lessor after a car is totaled and that it is cheap to add to an insurance policy. Gap insurance pays the difference between a totaled car’s value and the loan or lease balance. It’s especially beneficial for cars that depreciate rapidly.
Benefits of Gap Insurance
Gap insurance can save you a lot of money if your financed or leased car gets totaled.
Adding gap insurance to an existing auto policy will usually cost just a few dollars per month. Gap coverage from a dealer is often overpriced, though.
Gap insurance can provide peace of mind when buying a new car, which is especially important if you saved up for a while to make the down payment.
On the other hand, the main drawback of gap insurance is that it’s a specialized type of coverage. It usually applies only if your car is totaled in a scenario covered by your comprehensive or collision insurance. If your car is damaged but not declared a total loss, gap insurance will not pay. Similarly, gap insurance does not apply if you are simply unable to make your car payments.
Scenarios When Gap Insurance Has the Most Benefits
Gap insurance is important for drivers who cannot afford to pay the remaining balance of their car loan or lease if their vehicle is totaled. Gap coverage also is a good investment for cars with low resale values, which are likely to produce a bigger gap if totaled. Drivers who take out long-term loans with a small down payment should consider purchasing gap insurance as well, since their loan balances will be especially high.
Gap insurance is worth it if you paid a small down payment on your car, your loan term is 4-5 years, or your car will depreciate quickly. Gap insurance is never mandated by state law, and few lenders or lessors require it, so the decision to buy it depends on personal circumstances.… read full answer
When Gap Insurance Is Worth It
You don’t have the savings to pay off your loan or lease if the car is totaled or stolen.
Your down payment is less than 20% of the car’s value.
Your loan will last four years or more.
You drive more miles than average, which reduces the car’s value faster.
Your car is a make and model that depreciates especially fast, like a luxury sedan or electric vehicle.
You are a single-car household and need a car to get around.
Your loan includes negative equity from your last car.
Since gap insurance covers the difference between the car’s actual cash value and the amount you owe, researching these two numbers will be a key deciding factor in whether gap insurance is worth it.
For example, say you buy a car for $20,000 and your down payment is $2,000. This small down payment suggests that gap insurance might be worth it, but it’s still a good idea to check the car’s anticipated value after a year to determine if there will be a gap. If the car is worth $12,000 after a year but you’ll still owe $15,000, gap insurance could be a smart investment. If you don’t buy gap insurance and this car is totaled after a year, you’ll still owe $3,000 even though you can no longer drive it.
On the other hand, if your down payment is large enough or the car’s resale value is high enough that you’ll never owe more than the car is worth, gap insurance is unnecessary. Similarly, if you do owe more than the car is worth but you have the resources to pay the difference if the worst happens, it might be worth taking the risk.
Gap insurance does not pay when a car needs normal repairs, when a car is damaged but not declared a total loss, or when a driver does not make the necessary payments. Gap insurance only pays when a car is totaled and there is a difference between the lease or loan balance and the car’s value.… read full answer
It’s also worth noting that certain insurers limit the amount a gap insurance policy will pay, often to 25% of the car’s value. Policies with a 25% cap are usually called “loan/lease coverage.”
Gap Insurance Won’t Pay For:
A car’s reduced value after an accident that does not total it
Normal repair needs
A rental car after an accident
A new car
The gap between the car’s value and the loan or lease balance after engine failure
Extended warranty coverage that was included in the original loan or lease balance
Money included in a loan or lease balance that was rolled over from a previously financed car
Injuries, lost wages, or damage to other people’s property from an accident
Car payments missed due to unemployment, injury, disability or death
In addition, many gap insurance providers will not pay your collision or comprehensive deductible, though it depends on the specifics of your policy.
To get a gap insurance refund, contact the insurance provider and give them the policy number and documents showing that the car was traded in, sold, or paid off early. Gap insurance refunds are usually only possible for policies that were paid in full up front. Drivers cannot get refunds simply because they never filed a gap insurance claim.… read full answer
If you are cancelling within 30 days after the policy’s start date, you might be able to get a full refund, minus any cancellation fees. In other cases, only a partial refund may be possible. The details will depend on your policy and your state’s laws.
When You Can Get a Gap Insurance Refund
You are paying off, selling, or trading in the covered car.
You are switching to a different gap insurance company.
Your loan balance is no longer more than the car’s actual value, though it’s best to leave a cushion of $1,000-$2,000.
If you need a gap insurance refund because you’re selling or trading in the car, be sure to wait until the car no longer legally belongs to you before cancelling your gap insurance. Then, you will need to give the appropriate paperwork to your insurance provider, such as a proof of sale or auto payoff letter. Some gap insurance companies might also require an odometer verification showing the mileage on your car, which you can get from a dealership before you sell or trade in the vehicle.
Similarly, if you’re refinancing, wait to cancel your gap insurance until your previous loan is no longer in effect.
On the other hand, drivers cannot get a gap insurance refund if the insured car is declared a total loss before the policy’s expiration date. In this case, the gap insurance will pay for the difference between the car’s value and the loan balance, but drivers will not be eligible for a refund for the remaining months of coverage.
How Long Does It Take to Get a Gap Insurance Refund?
Gap insurance refunds usually take 4-6 weeks. Staying in contact with your gap insurance provider and promptly returning signed paperwork can expedite the process, though.
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