Ready to learn all there is to know about gap insurance? You have come to the right place. Keep reading to learn more about how gap insurance works, if it is required, and how you can cancel it and qualify for an insurance refund.
Gap insurance defined
First thing's first, what is gap insurance? Gap insurance is a type of car insurance coverage that means guaranteed asset protection. It is sometimes also referred to as guaranteed auto protection or loan/lease gap coverage. It is designed to protect new vehicles that are financed or leased. Specifically, it can cover the “gap” between what a policyholder would owe on their vehicle loan or lease and the depreciated value of their vehicle if it was lost or damaged beyond repair. Note that the reason for the accident would have to be covered by your car insurance policy. For example, if you had comprehensive coverage, or parked car insurance, as part of your auto insurance policy with theft as a named peril, and your vehicle was stolen, gap insurance can help pay to cover the outstanding balance you owe to the leasing company. Similarly, if you got into an accident and totalled your vehicle, gap coverage may also cover you. While this coverage can be beneficial, it is important to note that this is only available for brand new vehicles, typically it is only available for 36 months, however some insurers will extend this coverage to 48 months if that is something their underwriters offer.
Why is gap coverage important?
The reason that gap coverage is so important, especially for leased or financed vehicles is since cars depreciate in value. Many objects depreciate, but few as fast as cars. In fact, experts estimate that a new car depreciates at a rate of roughly 20% in the first year alone. For the following four years, it will lose an additional 10% to 15% of its value each year. With a standard car insurance policy that does not include gap insurance, your insurer would only cover the actual cash value of the car, which takes into account depreciation, if it was stolen or totalled. This means that if you financed a car for $20,000 and it was stolen after one year, the insurance provider likely would not pay out more than $16,000, leaving you to cover the rest. This is because they would factor in the 20% drop in depreciation. However, if you added gap insurance to your car insurance plan, then the insurance company would pay for the actual cash value of the car in addition to the outstanding balance of your loan. At the end of the day, gap coverage is important due to how much cars depreciate. Therefore, it is recommended for anyone in the following situations:
- If you are financing a vehicle for 60 months or longer
- If you are leasing a car
- If you bought a car that depreciates faster than the average car
- If your vehicle down payment was less than 20%
Is gap insurance mandatory?
Gap insurance is not mandated by the government but that doesn’t mean it isn’t required in some cases. For example, if you lease a car, many leasing companies require you to purchase gap coverage by making it a condition of your lease agreement. Meanwhile, if you are financing a vehicle, your lender may not require it, but it is still generally a wise decision. Gap coverage can usually be purchased directly from the leasing company or lender, or through a car dealership or independent insurance company. Note that if you opt to buy gap insurance directly from a car dealership or lender, they may incorporate it into your loan total. It may also come at a premium when purchased from a dealership, lender, or leasing company, which is why customers may prefer to purchase gap insurance from an auto insurance company. A BrokerLink insurance broker can help you weigh your options to ensure you do not overpay for gap coverage, no matter which source you choose to buy it from.
Where to buy gap insurance
Gap insurance is typically purchased from three main places: car insurance companies, car dealerships , and banks or credit unions. When you purchase a policy with gap insurance, customers usually have the option of paying for their premium upfront in one lump sum payment or monthly. Both have their pros and cons, though the latter may come with additional transaction fees so it’s important to ask about these in advance. It’s also worth noting that if you opt for one upfront payment and you end up cancelling your coverage, your insurer may refund you for the unused portion of your policy. Alternatively, if you choose a monthly payment schedule, you will likely receive a smaller refund if you decide to cancel.
What is not included in gap insurance coverage?
Purchasing gap insurance can provide peace of mind to policyholders. That said, all insurance coverage comes with exclusions, and that includes gap insurance. It is equally important to know what gap insurance does and does not cover. The following is a list of expenses that may not be covered by gap insurance, meaning you would still owe the costs to your lender or leasing company in the event of an incident:
- Any previous damage, storage, towing, or wear and tear to the car
- Remaining balances from prior leases or loans
- Extended warranty costs
- Lease security deposits
- Penalties for excessive mileage
- Overdue payments
- Non-OEM parts added to the vehicle, like stereos or navigation systems
Cancelling gap insurance coverage
Adding gap insurance coverage to your car insurance policy is one thing, but what happens if you decide you want to cancel it? After adding gap insurance to your car insurance plan, you may decide you want to cancel it once your loan falls below the value of the vehicle. The amount of time this takes varies but is often roughly two years after the loan began. Other reasons you may want to cancel your coverage are if you decide to trade or sell your vehicle before the lease is up or if you find a way to pay off your loan early.
Note that if you lease the vehicle, your lease agreement may stipulate that you must maintain gap coverage or a waiver of depreciation until the end of the term. Therefore, you may be contractually obligated to keep some type of gap coverage no matter how much of your loan you've paid off or how much the vehicle depreciates in value. Similarly, if a lender is the one requiring you to purchase gap insurance, your financing contract may state that you must keep the coverage until the loan is paid off in full. Therefore, to determine whether cancelling gap insurance is even an option for you, you will need to review your lease agreement or loan contract. A licenced insurance professional at BrokerLink would be happy to go through and help you understand your contract if you need help.
One final thing to note about cancelling a gap insurance policy is that you may incur a termination fee if you decide to cancel your coverage early. These fees vary, which is yet another reason it is worth speaking with an insurance broker.
Can I get a gap insurance refund?
Some customers may qualify for a gap insurance refund if they decide to cancel their coverage. The conditions that must be met to qualify vary between insurance providers. However, generally, people cancel their gap insurance coverage for the following reasons:
- You no longer want or need the insurance coverage
- You want to switch gap insurance companies
- You paid off your car loan or paid off enough of it that the remainder is now less than the actual cash value of the car
- You sold or traded your car
If your gap insurance coverage has not expired and your lease agreement or loan contract does not require you to maintain coverage, you can cancel it and request a refund by contacting your car insurance provider. Specifically, the refund you request will be for the unused portion of the coverage. For instance, if you have four months of coverage left on a year-long gap insurance policy and you wish to cancel, the insurer might reimburse you for the unused four months less any applicable termination fees.
Can I get a gap insurance refund following a total loss?
No. If your car is stolen or totalled and deemed a total loss, and your gap insurance covers the difference between the amount you owe on your loan and the actual cash value of the car, then you will not qualify for a gap insurance refund for the unused portion of your policy. However, you may get a portion of your money back if you were to cancel the policy altogether following a total loss.
Can I get a gap insurance refund from a car dealership?
If you bought gap insurance directly from the car dealership that you leased your car from, you may still be able to request a refund just as if you had purchased the coverage from an insurance company or bank. However, you may only be eligible if your current auto insurance policy is still valid, and you have not already received a gap claim payout.
Gap insurance refund refusal
As a customer, there are many circumstances in which you are within your right to cancel your gap insurance policy and request a refund for the unused portion. However, there are a few situations in which your gap insurance refund request is likely to be refused. The first is if your gap insurance policy has expired, the second is if the deadline to file a claim has passed, and the third is if you failed to pay for your gap insurance policy.
A step-by-step guide to cancelling gap insurance and receiving a refund
If you decide that you want to cancel your gap insurance policy before the term has expired, and you are eligible to apply for a refund, you can do so with your insurance company. Please note that in most cases, the insurance company will not notify you that you are owed a refund and is unlikely to automatically reimburse you. Therefore, you will need to take the following steps to ensure you receive a refund for the unused portion of your gap insurance coverage:
1. Review the terms of your policy to find out if a gap insurance refund is possible
Before contacting your insurance provider, find a copy of your policy and review it to make sure that your insurance company even offers gap insurance refunds and that you are eligible for one. If you need help looking over your policy, contact a BrokerLink insurance advisor.
2. Purchase a new gap insurance policy if necessary
If you are cancelling your current gap insurance coverage because you are switching insurance providers and want to cancel to obtain a new gap insurance from a different provider, make sure that your new policy is ready to go. You do not want to risk a lapse in coverage, so be sure that your new gap insurance coverage or endorsement begins the same date that your current coverage ends, otherwise you may no longer be eligible for coverage if you have a lapse in gap coverage.
3. Contact the insurance company, lender, or dealership
Depending on who you purchased gap insurance from, you will need to contact your insurance company, your lender/bank, or car dealership to ask for a copy of all the forms you need to fill out to cancel your policy. Be sure to also request the forms you need to request a gap insurance refund, as these might be different.
4. Gather all necessary information and documents
Anytime you cancel gap insurance coverage, you should start gathering a variety of relevant information and documents. Your insurance company is likely to request key pieces of information, like proof that your car has been was sold, traded, or that the loan was paid in full, as well as verification of your car’s current mileage. To verify your car’s mileage, try to obtain an odometer disclosure statement from the car dealership. Further, if you are cancelling your coverage after paying off your car loan in full, you may also be required to provide a copy of the payoff letter, which includes the details of your remaining gap insurance balance.
Pro tip: if you are cancelling your coverage because you traded or sold your car, don’t cancel it until the sale is complete or you run the risk of being left without coverage.
5. Fill out and submit all forms
The next step is to fill out and submit all necessary cancellation and refund request forms. If you have questions or do not understand how to fill out a particular form, please contact BrokerLink for advice. We will connect you with a car insurance expert who can answer all of your questions about cancelling gap insurance coverage.
6. Your insurance company cancels your coverage and issues your refund
The final last step is when your insurance company (hopefully) agrees to cancel your coverage and issue you a refund. The refund may be sent to you in a number of ways, such as a cheque or in the form of a direct deposit. Note that the refund process can be lengthy, though it depends on the insurance company. It could take only a few days, or it could take as long as six weeks. Contact your insurance provider directly for more information on how long you should expect the gap insurance refund process to take.
Contact BrokerLink for more information on cancelling gap insurance coverage
If you want to learn more about what gap insurance coverage is, when it might be worthwhile, or any other questions you may have, contact BrokerLink today. We have an entire team of dedicated car insurance specialists who would be happy to help you better understand how gap insurance coverage works. They can give you advice on whether it is worthwhile for you and inform you about whether you are eligible for a refund. As a full-service insurance brokerage, a BrokerLink insurance broker can also help you purchase a basic car insurance policy that includes all mandatory insurance coverage, including accident benefits coverage. One of our advisors can also help you with expired car insurance renewal or purchasing a brand-new insurance policy. Contact BrokerLink by phone or email to begin your car insurance journey today. You can also visit us in person at any of our 200+ locations across Canada.
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FAQs on cancelling gap insurance from car dealerships
How long do I need gap insurance coverage?
The length of time that you need gap insurance coverage varies from person to person. Some leasing companies or lenders stipulate that borrowers must have a valid gap insurance policy throughout the duration of the loan, regardless of how much money they have paid off. How long you need gap insurance coverage for will also depend on how long you keep your vehicle. If you decide to sell or trade it early, you may no longer need gap coverage and may be able to cancel your policy.
How much does gap insurance cost?
The cost of gap insurance is dependent on many factors. If you decide to purchase it from a car dealership, leasing company, lender, or bank, there may be a flat fee for all drivers, regardless of personal circumstances. However, if you purchase gap insurance from an insurance provider, then the cost will be factored into your overall auto insurance premium and will depend on a variety of factors like your age, location, driving record, driving experience, claims history, gender, the type of car you drive, and more.
How do I know if I have gap insurance?
You will know if you have gap insurance by checking your auto insurance policy, lease agreement, or loan contract. If you purchased gap insurance, it will be clearly stated in one of these documents with the terms and conditions of coverage.
Do I need to buy gap insurance?
You may need to buy gap insurance. It ultimately depends on the terms and conditions of your lease agreement or loan contract. Some leasing companies and lenders require borrowers to purchase gap coverage. If your agreement does not stipulate this, you may still find gap coverage to be worthwhile. In such a scenario, you would need to purchase gap insurance independently from an auto insurance provider or through an insurance broker.
How long does it take to receive a gap insurance refund?
The answer to this question varies as the gap insurance refund processing times differ between insurance providers. You can expect to receive a refund payout in roughly 30 days. However, in some cases, it will be faster and in others, it will be slower, processing could take-up to six weeks.
How do I calculate my gap insurance refund?
The refund amount you will be eligible to receive will depend on how much your gap insurance policy costs and how much time is left in the term. Since most gap insurance policies have year-long terms, you can calculate your gap insurance refund by dividing your annual premium by the number of months in your policy term and then multiplying that number by the number of months left in your term.
For example, if your gap insurance coverage cost $100 per year and the term was twelve months, you would divide 100 by 12 to give you a monthly cost of $8.30. If you wanted to cancel your policy three months before it ended, you would then multiply the monthly rate of $8.30 by three to give you a total refund amount of $24.90. However, some companies may have cancellation fees or penalties for early cancellation, so it is important to inquire about refund amounts, so you are not caught off guard.
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