How to Cancel Gap Insurance and Get a Refund

What Is a Gap Insurance Refund?

When you cancel gap insurance, a gap insurance refund may be issued to reimburse you for the unused portion of your coverage. For instance, if you pay your annual gap insurance premium in January and cancel coverage before the year ends, you're typically entitled to a refund for the rest of the year's coverage.

The term "gap insurance" is often used to describe two different types of coverage. It's important to know which you have before you try to get a refund.

• Gap insurance is sold by auto insurance companies. You generally need to have comprehensive and collision coverage before you can add gap coverage to your car insurance policy. In return for gap coverage, you pay a premium to the insurance company—generally about $90 annually, according to data from Insure.com. If your car is totaled, the insurer pays you the car's actual cash value, as well as the amount above the car's value allowing you to pay off the car loan or lease.
• Gap waivers, which aren't insurance, may be sold at the dealership as an add-on to your auto loan or included as part of your lease contract. If you have a gap waiver and your vehicle is totaled, the lender waives your responsibility for any outstanding loan or lease balance above the vehicle's actual cash value. Instead of ongoing premiums, a gap waiver typically involves a one-time payment, which may be rolled into your auto loan. Gap waivers usually cost significantly more than gap insurance, up to $1,500 or more in some cases.

How Gap Insurance Refunds Work

When you cancel gap insurance, you generally receive a refund for the coverage you didn't use.

• If you paid upfront: When you pay a lump sum—say, for six or 12 months of coverage—and cancel your gap insurance before that term ends, your refund is usually prorated to reflect the unused months of coverage. For instance, if you purchase a year's worth of gap insurance in January and cancel after three months, you'll typically get a refund for nine months' worth of coverage.
• If you make monthly payments: Depending on when you cancel your policy, you may get a prorated refund for the remainder of the month in which you cancel. For instance, if you cancel gap insurance close to the beginning of the month or the billing cycle, you'll generally get a partial refund for that month or cycle. Cancel late in the month or billing cycle, though, and your chances of getting a refund decrease.

However you pay your gap insurance premiums, there may be an early termination fee for canceling your coverage. Check with your insurance company regarding their cancellation and refund policies so you know what to expect before you cancel your gap insurance.

When Can You Get a Gap Insurance Refund?

Here are some situations where you may want to cancel your gap insurance and ask for a refund.

Your Car Is Paid Off

After your auto loan is paid off, you can drop gap insurance. There's no lender to pay if a car you own is totaled because there's no loan.

Your Car Is Worth More Than You Owe

If you owe less on your auto loan than your car is worth, you don't need gap insurance. There's no longer a "gap" between your loan balance and your vehicle's value to worry about. How soon this happens depends on how quickly your vehicle depreciates in value, but the gap typically closes when a car is two or three years old.

You Sell or Trade In Your Car

Once you sell or trade in a leased or financed car, you'll pay off the lease or loan and won't need gap insurance anymore.

You Change Insurance Companies

You can cancel gap insurance if you find a lower price elsewhere or want to switch insurance carriers for any reason, such as bundling your home and auto coverage.

How to Cancel Your Gap Insurance Policy

Follow these steps to cancel your gap insurance coverage.

1. Contact your insurance company. You can generally cancel gap insurance purchased from an insurance company by phone or mail, online or by using the insurance carrier's app.
2. Find out how you'll get your refund. Your insurance company may give you the option to receive your refund via your original method of payment, such as your credit card or checking account, or to use it as a credit toward future premiums.
3. Get confirmation. Make sure you have a record of your cancellation request so you can follow up if there's a delay with your refund.
4. Receive your refund. Check your credit card statement or bank balance to see if you've received the refund.

To cancel a gap waiver included in your auto loan or lease, refer to your contract. You can also contact the lender or dealer to find out how to cancel your gap waiver and the amount of refund you may be entitled to. State laws differ as to how gap waiver refund amounts are determined, whether auto dealers or lenders are responsible for issuing them and when consumers are entitled to them.

Mind the Gap

Gap insurance can prevent an accident that totals your car from totaling your emergency fund, too. Once you no longer need gap insurance, however, canceling it and getting a refund can put some extra cash in your pocket.

Improving your credit score is another way you may be able to keep more money in your pocket. Good credit can help you qualify for lower interest rates on auto loans and even pay less for car insurance. Make it a habit to check your credit score on a regular basis and take steps to improve your credit if necessary. Doing so could pay off in lower loan costs and insurance premiums.