Do You Get Money Back from Unused Gap Insurance?
Last Updated on May 13, 2020
Gap insurance covers the gap between the value of your car and the amount owed on your vehicle. Many drivers pay for gap insurance but never use it. Are you entitled to a gap insurance refund?
Receiving a refund on gap insurance is unlikely. It’s rare to receive a refund on any type of insurance – including gap insurance. Even though you paid for gap insurance, and even though you never made a claim with gap insurance, you may not receive a refund.
How Does Gap Insurance Work?
Gap insurance is a unique type of insurance policy that covers the difference between the value of your vehicle and the amount owed on that vehicle.
If you are leasing or financing a vehicle, then you may need gap insurance on the vehicle. Gap insurance is part of your lending terms. In many cases, gap insurance is built into your car payments – just like interest. In this situation, gap insurance protects the collateral of your loan – your vehicle.
Why do you need gap insurance on new vehicles? Why is there a “gap” in value? It comes down to actual cash value versus the price you paid for your vehicle.
ACV vs. Amount Paid
Actual Cash Value (ACV): This is the value of your vehicle before a loss. It’s the amount of money you would normally receive from your insurance company after a loss. A standard car insurance policy covers damages or losses up to the actual cash value of your vehicle. The value of your vehicle is different from the price you paid for that vehicle. It’s the value of your vehicle minus depreciation.
The Amount You Paid: The amount you paid for your vehicle is more than the actual cash value. New cars depreciate quickly. Within the first few months of ownership, the value of a new car can drop by 10% to 20%. That means the amount you paid (and the amount owed) for your vehicle is more than the amount you would receive from your insurance company.
Confused? Let’s say you buy a car for $25,000. You owe $25,000 to the dealership for that vehicle. The vehicle is the collateral for the loan. It secures the loan: if you don’t pay your loan payments, then the dealership takes the vehicle back.
Now, let’s say you get into an accident two months after buying the vehicle. It’s a severe accident, and your vehicle is a total loss. The insurance company agrees to cover the full value of your vehicle, which they estimate at $19,000. You receive a $19,000 payment from your insurance company, but you still owe roughly $25,000 on your loan. There’s a “gap” between the value of your vehicle and the amount you owe.
Gap insurance is only available on new vehicles. It’s actually not recommended to purchase gap insurance on a used vehicle. Not all insurance companies offer gap insurance, so if you are looking for this type of coverage, check out our list of insurers that sell it.
Requesting a Refund on Gap Insurance
It’s rare to make an insurance claim on a new vehicle. In most cases, drivers will pay for gap insurance, then never make a claim.
You’ve paid for gap insurance for multiple years. Are you entitled to a refund on gap insurance? Can you request a refund on any gap insurance payments you have made?
You are unlikely to get a refund on any type of gap insurance payments.
You don’t receive refunds on other types of insurance if you never make a claim – so you’re not entitled to a refund on gap insurance payments. After all, the insurance company covered your risk for a certain period of time, and the company received payment in exchange for covering that risk. If you never make a claim, then the insurance company made a profit off you; if you do make a claim, then the insurance company lost money.
Refunds on Prepaid Gap Insurance or Car Payments
You may receive a refund on gap insurance if you prepaid your car payments. If you paid car payments in advance, then paid off your vehicle early, then it’s possible you may receive a small refund on gap insurance payments.
However, most financing arrangements have interest, gap insurance, and other fees built into your monthly payment, and there’s little incentive to pay your car loan early. You’re paying for interest and gap insurance regardless – so you may not be entitled to a refund.
Refunds on Gap Insurance During Vehicle Trade-ins
You may also hear about gap insurance refunds when trading in your vehicle to the dealership.
Let’s say you bought a vehicle with gap insurance built into the contract, owned the vehicle for 1-2 years, then traded in the vehicle to the dealership. You may receive a small refund on gap insurance because you paid into gap insurance for that vehicle, but that gap insurance no longer covers you.
For the same reason, you may receive a refund on gap insurance when selling your vehicle – even if you’re not trading it in.
Check your insurance policy documentation to verify any gap insurance refund information on trade-ins or sales.
Final Word on Gap Insurance Refunds
Check your lease or financing agreement for any information about gap insurance refunds. In most cases, you will not receive a refund on gap insurance payments. It doesn’t matter if you prepay car payments, or if you never make a claim on gap insurance – you will not typically receive money back on unused gap insurance.