How do I get a gap insurance refund?

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

Gap Insurance Is Worth It When:

• 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 and your gap insurance provider doesn’t exclude previous cars’ loan balances from coverage.

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 works by paying the difference between what a driver owes on a leased or financed car and what the vehicle is actually worth if it is declared a total loss. Gap insurance, which stands for guaranteed asset (or auto) protection, pays off the remaining balance owed so that a driver does not have to make payments on a car that is no longer drivable.… read full answer

Gap coverage usually only applies when a driver has comprehensive and collision insurance. Collision or comprehensive coverage will pay out the car’s value if it’s a total loss, and then gap insurance fills in the rest.

What Does Gap Insurance Cover?

Gap insurance ultimately covers depreciation, which is important because new cars quickly lose their value. Cars have different resale values, so depreciation varies by vehicle. But on average, a car loses about 11% of its value on the first day alone, and about 20% - 30% of its value within the first year.

A car’s depreciation rate, as well as the loan/lease balance and interest rate, will affect the gap between how much a driver owes on the car and the amount the car is actually worth. When there’s a difference between these two numbers, gap insurance covers that difference. Owing more than the car is worth is called being “underwater” or “upside down” on your loan.

For example, say you buy a $50,000 car with a down payment of $10,000. Three years later, the car is worth $20,000, but you still owe $24,000 on the loan. If the car is totaled in an accident or stolen and declared a total loss, your normal insurance policy will pay $20,000, or the car’s actual cash value (ACV), minus your deductible.

If you don’t have gap insurance, you’ll still owe $4,000, and you’ll still have to pay off the car even though you can’t drive it. But if you do have gap insurance, it will pay the $4,000. Some gap insurance policies even pay your deductible, though most do not.

What Gap Insurance Does Not Cover

• Medical bills for you or another driver
• Damage to another driver’s property
• The cost of repairing or replacing your vehicle
• Car payments missed due to personal circumstances like an injury or job loss
• Reduced value after an accident that does not total the car
• Engine failure or a mechanical problem

It’s also important to keep in mind that the money you receive from gap insurance will go to your lender or lessor, not toward your purchase of a new car. If you’re interested in coverage that will help you buy a car in the future, look into new car replacement insurance instead.

Finally, you can buy gap insurance from a dealership, bank, credit union, or car insurance company. It’s not legally mandated in any state, though car dealerships will sometimes require it on a leased or financed vehicle. If you sell a car, pay it off early, or trade it in, you can usually receive a gap insurance refund.