How to Cancel Gap Insurance
When you’re buying a new car, negotiating the price is only half the battle. After that comes an onslaught of extras: Do you want the corrosion protection? How about paint sealant? Window etching? Extended warranty? Gap insurance?
It’s all too easy to say yes to that last offer, especially when the dealer offers to roll the gap insurance premium into your car loan amount. But if you buy it from the dealer, you’re probably paying too much. Do you really need gap insurance? And can you cancel gap insurance after you’ve purchased it?
We will begin with a brief overview of how gap insurance works and reasons why you should have it on your policy. After we understand what it is, we will then explain when is the best time to drop gap insurance and the process of canceling it.
What Is Gap Insurance?
Gap insurance (aka “guaranteed auto protection”) covers the difference between what your new car or truck is worth and the amount you owe on it. A vehicle begins to depreciate the second you drive it off the lot. Most cars lose 20 percent of their value within a year.
Let’s say you buy a brand-new, bright red Ford F-150 XL with a sticker price of $28,000. You love that truck — but then, a few months after you sign the loan, you skid on a wet road and slam into an overpass. You’re OK, but your ride is totaled. Your insurance will only pay $24,000, which is the truck’s depreciated value; but you owe $26,000 on the loan. Gap insurance can cover that $2,000 gap, so you don’t have to pay it out of pocket.
Does Gap Insurance Cover Missed Car Payments?
No! Some people think gap insurance is a broad insurance policy that covers all kinds of situations, like missing a car payment, repairs to a new car, medical bills after an accident, or the balance of the loan if the car is repossessed. It does not cover these things. Gap insurance only covers one specific thing: the difference between the actual cash value of your vehicle, minus the deductible, and the amount you owe on the vehicle, should your vehicle be stolen or totaled.
Read the fine print when you buy gap insurance, too. Some policies may exclude certain losses — if you total the car in a DUI accident, for instance, it might not be covered.
Do I Really Need Gap Insurance?
The Insurance Information Institute recommends getting it if you:
- Make less than a 20 percent down payment
- Finance for 60 months or longer
- Lease a vehicle (carrying gap insurance is generally required for a lease)
- Purchase a vehicle that depreciates faster than average
- Roll over negative equity from an old car loan into the new loan
How Much Does Gap Insurance Cost?
That depends on the value of your car and where you get your insurance — from the dealer or from your insurance company. If you buy gap insurance from the dealer, it may cost a lump sum of around $500 to $1,000. If you buy gap insurance from your auto insurer, it may cost around 5 percent of your regular collision and comprehensive premium. If your C&C premium is $700 per year, then you’d pay $35 for a full year of gap insurance. That’s a much better deal.
When Should I Cancel Gap Insurance?
There are four scenarios in which we’d recommend you cancel your gap insurance.
- You overpaid for it when you bought your car.
If you succumbed to sales pressure and bought gap insurance from the dealer, don’t get mad. Get a refund! Just be sure to act quickly. Typically, you have 30 days to cancel the insurance policy and get full reimbursement. After that, you may get a prorated refund or you must pay a fee. Read your policy documents to find out how to cancel your gap insurance. Then, buy a new gap insurance policy from your regular insurance company.
- Your car is no longer brand new.
Keep in mind that you only need gap insurance for a short time, usually one to two years. After that time, the amount you owe should be less than the car is worth. Wondering when you’ll hit that tipping point? First, look at your car loan statement to see how much you owe on the vehicle itself (excluding any extras). Then, check your car’s approximate value on the Kelley Blue Book site. If your car’s value is now close to the loan balance, you’re good to cancel.
- You sold the car or paid off your loan.
Gap insurance can’t be transferred to a new vehicle (you’ll have to buy a new policy), so if you get rid of your car, your gap insurance will be canceled. If you bought the dealer’s insurance and paid up front, you should get a refund. Likewise, if you’ve paid off your loan, you don’t need gap insurance — because there’s no gap to worry about!
- You really, really need to cut your car insurance premiums.
If car insurance is a major drain on your budget, you may be looking for ways to save. Canceling gap insurance is one way you can cut costs. The best way to save? Shop for auto insurance quotes online at Compare.com. In just a few minutes, you can see personalized, unbiased quotes from multiple insurance companies, and then pick the best deal. Once you’ve found a cheap policy, you can ask your new insurer for a gap insurance quote, if you still need it.