Cancel and Save: GAP Car Insurance Not a Long-Term Need | Cheap Car Insurance
Everyone knows that a new car depreciates the moment you drive it off the lot. And savvy car buyers know that if you opt for a new car but don’t plunk down a huge down payment, a product called GAP insurance can save you from disaster.
But not everyone knows that GAP insurance eventually outlives its usefulness, and if you cancel your policy, you could save yourself some real money.
First the basics: Guaranteed auto protection insurance, more commonly known as GAP insurance, covers the difference between what you still owe on your vehicle and the actual cash value of the vehicle.
This is important when you buy a new car, but could also save you if you are buying a used car and get “upside down” on your loan and owe more on your loan than the car is worth, such as when you use an especially long loan, or if you roll the cost of your previous loan into the new loan.
For example, if you buy a new car for $30,000 with a five-year loan, it would immediately depreciate after you drive it off the lot – let’s say 20 percent. Then each year it will depreciate further.
“You bear the biggest brunt as far as depreciation goes in the first two years. Then there could be another drop if another new fancy model comes out, but normally, you are hit hard for the first two years and then it is more gradual after that,” says Matt Jones, senior consumer advice editor at Edmunds.com.
If you get into an accident a month into owning the car and total your car, the actual cash value of the car may only be $24,000 because of that initial depreciation, but you may still owe $29,100.
That means that after all is said and done, you would still owe $5,100 toward the car, plus more for your deductible, even though you no longer own the vehicle.
That’s where GAP insurance comes in. GAP picks up that difference, and even picks up your policy’s deductible in some cases.
Even if you bought a pricy gap policy from the dealership for $800, that is still a pretty good deal for you.
Now, the tricky part comes in after your payments catch up to what your vehicle is worth, say in year three of owning the car.
By that point you will have paid off a substantial portion of your loan – more than half of it – and your car would likely have only depreciated by much less than half, meaning you are no longer upside down on your loan.
If you total your car after your car is worth more than your loan balance, the GAP policy wouldn’t pay you anything, but you are still paying for that policy.
This is when canceling it starts to make sense.
Each contract spells out how to properly cancel the policy. In many cases you can just call the company and cancel it over the phone. In other cases, you need to write a letter or call the insurance provider to get a cancelation form that you can sign and return.
According to Philip Reed, an auto writer, you should expect a little push back when it comes time to cancel the policy.
“You might have to wait on hold or go through a phone menu,” Reed says. “Naturally, they want to make it as difficult as possible to cancel.”
Part of why they don’t want to make it easy to cancel your policy is because, depending on how you bought that policy, you may get a refund for part of that policy.
“Be prepared and vigilant,” Reed says. “Think ahead of time about what you are going to say, because they will try to scare you. Be clear on the figures, but don’t get drawn into the discussion as to why you want to cancel. Just say you don’t need it anymore and that you have made up your mind.”
If you cancel within a few weeks of taking out the policy, you may get a full refund. But after that, you have “used up” the portion of the policy for the time that protected you, even if you didn’t need to use it by filing a claim. That means your refund will be prorated for the portion you have not yet used.
If you financed the GAP insurance and are making payments toward it, you wouldn’t get a refund because you haven’t yet paid for the portion that you are canceling. However, if you cancel it, you probably won’t owe the rest of the payments.
If the cost of the GAP insurance was rolled into the cost of your loan, then the insurer may send the refund to the lien holder, rather than to you, knocking off interest and payments at the end of your loan, but not necessarily knocking down your monthly payments.
In any case, you must contact the GAP provider in order to get the a refund – they aren’t automatic.
According to United Policyholders, a nonprofit group dedicated to informing people about insurance products, it is important to shop for your GAP policy just like you would shop for any insurance product.
If you buy the policy directly from the dealer, United Policyholders says you are likely to pay between $500 and $700 or more for the policy, but that is likely to be less if you shop it around to several insurance companies.
Reed said, if you shop well for your GAP insurance, the policies could be as inexpensive as $200.
If you didn’t pay much for it up front, it may not in fact make sense to cancel it because your refund might be pretty insignificant, Jones said.
“If they bought it for $400 and they are 3.5 years in to a four-year contract, and they cancel it, they might only get a few bucks back,” Jones says. “In some cases to open yourself up to a risk to save an insignificant amount, it may not necessarily be worth it.”
The best way to see if GAP insurance has outlived its usefulness is to go to one of the online price comparison sites, such as Edmunds, Kelly Blue Book or NADA.
Put in your vehicle’s details and it will give you a range of what that vehicle is worth. To be on the safe side, tell the site your vehicle is in “good” shape and look at the “trade in” value, which will be the lowest value.
Then go check your remaining loan balance with your bank. If the value is higher than the loan balance, a call to the GAP insurance company may be in order.
One time when you should always cancel GAP Insurance is if you pay off your loan early, refinance your loan, or if you sell the car. That’s because GAP insurance is only for the specific loan you initially took out, and once that loan is no longer in force, the GAP insurance is worthless.
By the same token, if you refinance and still need GAP insurance, you should shop around and take out a new policy after canceling the old one.
Jones said that if you are going to consider cancelling your GAP insurance, you should also look at the other things you might have purchased when you were sitting in the finance director’s office at the dealership – extended warrantees, prepaid satellite radio, service contracts, etc. If you sell the car, all of those can get you refunds.
“It breaks my heart is when people sell or trade in a car that still has an extended warrantee and they forget to cancel it, and they could leave $1,000 or more on the table,” Jones says.