When you purchase a new vehicle the dealer will more than likely try to sell you gap insurance. Most people often ask themselves why do I even need gap insurance and how does gap insurance even work? Adding gap insurance for your new car purchase is optional and most people aren’t are of the fact that you can get a gap insurance refund. In this article, we will explore how you can qualify for a gap insurance refund and how a gap insurance refund works.
Summary
- A gap insurance refund can be given to individuals who have paid off their auto loan early or have traded in their vehicle
- The gap insurance refund amount will depend on the value of your vehicle, auto loan amount, mileage, and the repayment term of the loan
What is Gap Insurance?
Before we dive into how to get a gap insurance refund, it’s important to get a solid understanding of what gap insurance is and why dealers try to sell it to consumers in the first place. When you buy a new vehicle, the value of the car depreciates the minute you drive it off the lot. This makes cars one of the worst assets to own.
If you finance your vehicle and only put down a small amount, there may be a period in which your car is worth less than what you owe on it. This is often a sad reality for many people who purchase a new vehicle. In the unfortunate event of an accident, your auto insurance coverage will only cover how much your car is worth based on the current market value. As a borrower, this can leave you owing money on an auto loan for a car that you can no longer drive.
This is where gap insurance comes in. Gap insurance is an optional policy that covers the difference between the value of what your insurance pays out and the outstanding loan. It’s meant to protect consumers that finance their new car purchases with a low down payment. However, most people are not aware that you can get a gap insurance refund.
How Does a Gap Insurance Refund Work?
Although you won’t get a full refund on your gap insurance policy once you pay off your car, you can still qualify for a portion of the premium. Car owners don’t need gap insurance, once the value of their car is more than the amount they owe on their auto loan. Below are some important points regarding gap insurance refunds.
- You can receive a gap insurance refund if you pay off your auto loan early or trade-in your vehicle
- The gap refund amount is based on the value of the car, loan amount, car mileage, and the terms of your loan repayment
- You can also receive a refund if you sell, or, refinance your vehicle
- If you have damaged or totaled your vehicle, you’re ineligible for a gap insurance refund
- It takes roughly 2-4 weeks to receive your gap insurance refund
Important Note: Depending on how you got your gap insurance, a refund may only be available if you’ve paid for the gap insurance upfront. This is common if you got your gap insurance through the dealership that sold you the vehicle.
Is Gap Insurance Automatically Refunded?
Unfortunately, a gap insurance refund doesn’t automatically occur. You have to apply for a refund through either your insurance company or the dealership you purchased your vehicle from. They will be able to verify if you qualify for the gap insurance refund and the amount.
How to Get Gap Insurance Refund After Trade-In?
If you end up trading in your vehicle, you make qualify for a gap insurance refund depending on the amount of your unused coverage from your gap insurance provider.
Trading in your vehicle essentially works out as a loan payoff since you no longer have to make auto payments. However, we advise consulting with your car dealership or insurance provider to confirm how refunds work with trade-ins.
How Long Does it Take to Get a Gap Insurance Refund?
As previously mentioned, a gap insurance refund can take between 2-4 weeks to receive. This waiting period really depends on the insurance company and whether or not they have received the necessary information from you. Generally, in most cases where car owners qualify for a refund, the whole process is relatively quick.
You have to ensure you accurately fill out all the relevant information. In some cases, the insurance company may request proof that your car has been paid off.
How To Get Gap Insurance Refund After Refinance?
When you refinance an auto loan, the old loan gets fully paid off by the new loan. Refinancing an auto loan is done to reduce the interest rate on the loan.
When your original loan gets paid off from a refinance, you will have to submit the necessary documents to your insurance carrier or dealership and request a refund.
How Is Gap Insurance Refund Calculated?
Insurance companies may have their own ways of calculating the insurance refund amount. However, you can do a simple calculation to get an estimate of the amount you are owed. The amount shouldn’t vary significantly from what the insurance company grants you.
Below is the formula you can use to get an estimate. With our example, we will assume your gap insurance policy is for 36 months with a total cost of $1,200. You end up paying your car off in 18 months and you apply to get a refund.
(Total Cost of Your Gap Insurance / Number of months you had coverage)
Monthly Premium Cost x Remaining Months
Let’s use the following example below.
- Total Cost of Your Gap Insurance = $1,200
- Monthly premium = $1,200/36 = $33.33
- Months you had coverage = 18
- Months Remaining on your policy = 18
- $33 x 18 = $594.00
- In this example, the total refund you would get from your insurance provider is approximately $594.0
How To Claim Gap Insurance Refund?
If you have refinanced your car, paid it off, or traded it in for a different one you can apply for a refund. The first thing to do is to either contact your insurance agent or the car dealership. Let them know you would like to cancel your policy. They will give you the necessary steps to follow in order to claim your refund.
The insurance company usually wants to see your odometer to verify your car’s mileage. In addition to this, if you have paid your car off, your insurance company will usually request a payoff letter from the lender to confirm.
Who Refunds The Gap Insurance Money? The Dealer or Financial Institution
This will depend on who you got the gap insurance policy from. Car Dealerships tend to work with a gap insurance provider when they help you finance your vehicle. So, if you purchased your gap insurance through your dealership when you originally financed your car, your dealership’s insurance company will be the one paying out the refund.
On the flip side, if you purchased your gap insurance through your auto insurance provider, which usually tends to be cheaper, they will issue you a refund.
When Should You Cancel Your Gap Insurance?
If you decide that you no longer want the gap insurance protection, you can request that the insurance company cancels the policy. You should cancel your gap insurance
- If you pay off your car earlier
- The appraised value of your car is 20% higher than what you owe on the loan
- You refinanced your vehicle and now owe less on the loan than your car is worth
Once you cancel your gap insurance, the insurance company will calculate the refund amount that they owe you.
Conclusion
Most consumers forget that they actually have gap insurance coverage. This is because dealers try to quickly sell it to them as you fill out all the paperwork for your new vehicle. A common question by consumers is how do I know if I have gap insurance?
Getting familiar with your insurance policy and car purchase agreement can help you find this out. If you pay off your car much earlier, you can potentially qualify for a refund and not even be aware of it. As such, it’s important to know your options as a consumer.
FAQ’s
Can you get a refund if you pay off your car on time?
You can’t get a refund if you paid off your car on time. Gap insurance refunds only apply if you paid off your car before the policy expires. The gap insurance policy period is usually shorter than the financing period for your vehicle.
