Can You Cancel Gap Insurance?

Sometimes canceling GAP insurance is crucial for those with auto loans or leases. GAP insurance covers the difference between your car’s value and the amount owed on a loan or lease after a total loss. If you've recently purchased a car with financing, you may have already purchased GAP insurance. However, if you've paid off your loan early or plan to sell your car, you might be wondering: Can I cancel GAP insurance and get a refund? In this article, we'll explore what GAP insurance is, how to cancel it, and request refunds.

What Is Gap Insurance?

GAP Insurance, short for Guaranteed Asset Protection, covers the financial gap between what you owe on a car loan or lease and the car’s actual cash value (ACV) if it’s totaled or stolen. GAP insurance is also referred to as guaranteed auto protection or loan/lease gap coverage.

When you purchase a new car and leave the lot, it starts depreciating quickly. Edmunds reports that a new car loses 9% of its true market value within just one minute of leaving the dealership.  According to the Kelley Blue Book (KBB), the car depreciation rate is 20% in the first year alone. This means a newly bought car loses 20% of its true market value (TMV) in the first year of functioning. That’s why driving a financed car is always risky as it can depreciate quickly and its value may get lower than the loan amount.

According to Statista, over 80% of new vehicles in the U.S. were financed in 2024, emphasizing the relevance of GAP insurance for many drivers or car owners. At the end of the day, with gap insurance coverage, you can ensure peace of mind as long as you’re driving a financed car. GAP coverage will protect you from owing thousands on a car you no longer have.

Read Our Detail Blog About: What Is Gap Insurance?

Why Is Gap Insurance Important and Who Needs It the Most?

If you have a financed car, you should consider gap insurance for your financial safety. Even though it’s an optional add-on in the U.S.A., it can be very important. If your financed or leased car is totaled, your insurance will only pay the car’s actual cash value (ACV), not the remaining loan balance.

For instance, if you owe $30,000 but the car’s ACV is $24,000, you’d still owe $6,000. GAP insurance covers that shortfall, sparing your financial stress. Moreover, cars lose value rapidly by 15% annually after the first year. This risk makes GAP insurance so important for those financing vehicles with little or no down payment.

So, how do you know whether you need gap coverage or not? Well, gap insurance is ideal for people in the following situations:

• New car buyers who financed over 80% of the car’s price.
• Leaseholders, as many leasing contracts require GAP coverage.
• Drivers with loans exceeding 60 months or 5 years, due to slower equity build-up.
• Car owners with less than 20% down payments.
• Owners of rapidly depreciating vehicles, like luxury or electric models.

What Does Gap Insurance Cover, And What Does It Not? 

GAP insurance includes:

• The difference between your car loan/lease balance and its ACV in a total loss.
• Financial protection in case of theft or accidents covered by your auto insurance policy

Here’s what insurance doesn’t cover:

• Pre-existing car damage, such as wear and tear.
• Overdue payments or late fees on your loan or lease.
• Extended warranty or add-ons like custom parts.
• Penalties for excess mileage on leases.
• Non-covered incidents, like mechanical failure or non-insurable accidents.

Can You Cancel Gap Insurance?

Yes, you can cancel your gap insurance. Most policies allow cancellation at any time, whether purchased through a dealership or an insurance company. However, your ability to cancel depends on your situation. If your loan is paid off, your car is sold, or the vehicle’s value exceeds the loan balance, you may no longer need coverage. Leased vehicles, however, often require GAP insurance for the entire lease term. Canceling may entitle you to a GAP insurance refund for unused premiums, especially if you paid upfront.

Possible Reasons to Cancel Your GAP Insurance

You might not need GAP insurance forever. There are valid reasons why drivers decide to cancel. For instance, if you’ve paid down your auto loan to less than the car’s actual cash value, the coverage becomes unnecessary. Also, switching to another provider or selling the vehicle could make cancellations a wise decision.

Reasons to cancel GAP insurance:  

• Loan balance is lower than your car’s value.
• You sold or traded the vehicle.
• You switched to another insurance company.
• The loan or lease is fully paid off.
• You found a better, cheaper GAP policy.

Things to Consider Before You Cancel GAP Insurance

Canceling GAP insurance isn’t always simple. Before you attempt to cancel one, review your loan or lease agreement. Some lenders or leasing companies require you to maintain GAP coverage until the contract ends. Also, early cancellation might involve fees. Be sure that your car’s cash value surpasses the loan balance. If not, canceling GAP could leave you vulnerable to financial risks.

Here are the things to consider before canceling gap insurance:

• Check if cancellation violates your loan or lease terms.
• Ensure your loan balance is lower than the car’s value.
• Be aware of possible cancellation fees.
• Confirm eligibility for a refund on unused premiums.
• Verify that your new policy (if switching) is active.

Can You Cancel GAP Insurance from a Dealership?

Yes, you can cancel GAP insurance purchased from a dealership. The process usually involves contacting the dealership directly and completing a GAP insurance cancellation form. You also need to be prepared to submit documents like an odometer disclosure statement or proof of loan payoff. Refunds for unused coverage often take 30 to 90 days to process. If you cancel within 30 days of purchase, some dealerships offer a full refund. Always look over the agreement to make sure you understand it.

How Do I Cancel Gap Insurance?

If you intend to cancel your gap insurance, it doesn’t have to be difficult. Whether you purchase it from a dealership or insurance company, you simply follow the right steps to ensure a smooth process. To start, compile the necessary documents and prepare for a refund of unused premiums. Let’s simplify it for you down below.

Before initiating the cancellation process, collect these necessary documents:

• GAP insurance cancellation form (provided by your insurance provider or car dealership).
• A copy of your odometer disclosure statement.  
• Proof of loan payoff or a letter from your lender confirming the loan is paid in full.
• Your original GAP insurance policy or contract details.
• A valid ID and other supporting documents as requested.

Step-by-Step Process to Cancel GAP Insurance and Receive a Refund

Here’s how you can cancel GAP insurance and claim a refund:

• Step 1. Review Your Policy: Carefully read your GAP insurance policy or loan agreement. Check for any conditions, such as cancellation fees or refund eligibility.
• Step 2. Contact Your Provider: Call or visit the dealership, insurance company, or lender where you purchased the policy. Request a cancellation form and clarify any extra steps (if any). Ask questions if you have any doubts or concerns.
• Step 3. Complete the Cancellation Form: Fill out the provided form. Make sure to include all necessary details, such as your policy number, vehicle information, and contact details.
• Step 4. Submit Supporting Documents: Along with the form, submit the required documents like the odometer disclosure statement to verify your car’s mileage, proof that your vehicle has been sold or traded, and proof of loan payoff. Verify that all information is accurate to avoid delays.
• Step 5. Follow-Up: Cancellation processing times vary. So, keep in touch with your provider to ensure your request is being processed. Refunds can take 4 to 6 weeks if purchased from an insurer and up to 90 days for dealership policies.
• Step 6. Receive Your Refund: Once your cancellation is approved, your provider will issue a refund for any unused premiums. Refunds are typically sent via check or direct deposit.

Can You Cancel Gap Insurance and Get a Refund?

The simple answer is yes, you can cancel gap insurance and receive a refund for unused premiums. However, it depends on your situation. If you’ve paid off your car loan, sold your car, or no longer need GAP coverage, you may be eligible for a partial refund. Refunds typically apply to policies paid upfront. However, refunds might not be available if you’ve filed a total loss claim or your policy has expired.

How Does a GAP Insurance Refund Work?

A gap insurance refund reimburses you for unused coverage when the policy is canceled early. The refund process varies depending on how you paid for the policy:

• Lump-Sum Payment: If you prepaid for coverage, the refund will be based on the remaining months of your policy.
• Monthly Payments: You won’t get a refund for past months, but canceling early may result in a small, prorated refund.

Steps to understand refunds:

• Determine if your policy allows refunds.
• Contact your insurance provider or dealership to initiate cancellation.
• Submit required documents, such as a loan payoff letter or proof of sale.
• Wait for the refund, which may take several weeks to process.

How to Calculate Your GAP Insurance Refund Amount? 

Calculating your refund is simple if you paid upfront. However, how much money you’ll get back as a refund depends on a few factors such as policy term length, value of your car, cancellation fees, amount of auto loan, and your car’s mileage.

If you still want to get a rough estimate of the refund amount, there is a simple math! Divide the total policy cost by the number of months it covers. Then, multiply this amount by the months remaining.

Example calculation:

• Policy costs: $600
• Coverage term: 24 months
• Months remaining: 12 months

Refund = (600 ÷ 24) × 12 = $300

Remember, refunds may exclude administrative fees or penalties.

How Long Does It Take to Get a Gap Insurance Refund?

The time frame for receiving a GAP insurance refund varies. Policies purchased through:

• Insurance companies: Refunds are processed in 4-6 weeks.
• Dealerships: Refunds may take up to 90 days.

To avoid delays, submit all the required documents as early as possible and follow up with your provider.

When Can You Get a GAP Insurance Refund?

You’re eligible for a refund in the following situations:

• You paid off the car loan early.
• You sold or traded the vehicle.
• You switched to a new GAP insurance company.
• Your loan balance is less than the car’s actual value.

Please note that you need to make sure that your policy hasn’t expired before requesting a refund.

Situations When You Cannot Get a GAP Insurance Refund 

You may not get a refund in some situations. Here are a few reasons why gap insurance doesn’t pay:

• If your gap insurance contract has expired
• If the gap policy lapsed due to non-payment
• If the cancellation fees exceed the refund amount
• Lease gap coverage is mandatory for leased vehicles
• If the policy already paid out for a total loss, no refund for unused months is granted
• If the loan payoff exceeds the refund amount

What Should You Do If Gap Insurance Provider Refuses to Refund?

There are a few situations where you might face a gap insurance refund refusal. For instance, if your gap coverage policy already expired, or the time limit to file a claim is passed, you might not get your money back. So, if your provider denies your refund request, take the following actions:

1. Request Clarification. Ask why your request was denied.
2. Review your contract. Make sure their decision aligns with your policy terms.
3. Contact a third party. Seek assistance from an insurance expert or attorney.
4. File a complaint. Report the issue to your state’s insurance regulator if you think your right to get the refund has been violated.  

Pro Tip: Always keep documentation of your communication and policy details. This strengthens your case if disputes arise. 

Also Learn: When Does Gap Insurance Not Pay?

Where Can I Purchase Gap Insurance?

If you're wondering where to buy gap insurance, you can choose between the dealer or an auto insurance company. Don’t hesitate to decide.

So, you can purchase gap insurance from three main sources:

1. Auto Dealers
2. Car Insurance Companies
3. Third-Party Providers

While car dealerships offer convenience, their policies tend to be more expensive, often costing $500 and $700 as a one-time fee. In contrast, adding gap insurance to an existing auto insurance policy through an affordable insurance agency can cost as little as $7 to $10 monthly. This makes insurance companies a lucrative and reliable choice for many drivers.

If you’re financing or leasing a vehicle, consider shopping around for affordable and comprehensive options. Always ensure to buy gap insurance from a trustworthy provider that guarantees savings, financial safety, and reliability.

How Much Does Gap Insurance Cost?

The gap insurance costs vary based on location, provider, car’s value, loan amount, payment method, and so on. The national average cost for gap insurance is $7.50 per month or $90 per year. Since gap insurance is an optional coverage, the insurance company simply adds it to your existing policy. This will likely raise your full coverage auto insurance premiums by $2 to $20 every month depending on the insurer. For instance, Coloradans pay roughly $20 to $700 for gap insurance depending on the provider. Gap insurance in Michigan typically costs between $2 and $30 per month. The price can vary depending on whether you buy it from a car dealership or an auto insurance provider.

A few states are given below, highlighting their gap insurance costs:  

Learn More in Detail: How Much Is Gap Insurance?

Get affordable full coverage auto insurance from L.A. Insurance today that includes gap coverage. Get a cheap auto insurance quote online right away or dial us at (800) 893-9393.

Does Gap Insurance Worth It?

Gap Insurance is worth it for many drivers, particularly those with loans or lease vehicles where auto loan balance surpasses the car’s actual cash value (ACV) due to rapid depreciation.

Here's when gap insurance really worth it:

• Loans with high interest rates
• Auto loan length is 5 years or longer
• Low or no down payment
• Rapidly depreciating vehicles
• Leased vehicles (mandatory)

Can I Cancel My Gap Insurance: The Bottom Line

Yes, you can cancel gap insurance, whether purchased through a dealership or insurance company. Canceling it makes sense if you’ve paid off your auto loans, sold your vehicle, or no longer need gap coverage. Most providers will refund the unused portion of your policy, but conditions apply. Refunds aren’t possible if the policy has expired, cancellation fees exceed the refund, or a total loss claim was paid out.

Please note that gap insurance is usually not mandatory for financed vehicles. However, it is recommended by lenders if your car is leased or financed for 80% to 90% of its value, and you make a small upfront payment when purchasing your car. Lenders typically require full coverage insurance on financed vehicles. If you have any questions about insurance requirements for financed vehicles, we encourage you to explore our recent article:

• Do you need full coverage on a financed car?
• Can I get liability insurance on a financed car?

Frequently Asked Questions (FAQs)

Can You Cancel Gap Insurance at Anytime? 

Yes, you can cancel GAP insurance at any time. However, timing matters. Canceling early in the policy term might make you eligible for a prorated refund of unused premiums. Check your policy terms and loan agreement to make sure cancellation doesn’t violate any conditions.

Can You Cancel Gap Insurance After 2 Years?

Yes, you can cancel gap insurance after two years, provided your policy hasn’t expired. If your loan balance is now lower than the car's true market value, canceling it is totally logical. Contact your provider, complete the cancellation form, and check for any applicable refund.

How Much Does It Cost to Cancel Gap Insurance?

Canceling gap insurance is usually free, but some providers may charge an administrative fee. These fees vary by provider and could reduce your refund amount if you cancel mid-policy. So, check your agreement to confirm if cancellation fees apply and how they impact your refund.

How Long Should You Keep Gap Insurance?

You should keep your gap insurance until your auto loan or lease balance is lower than the car’s ACV (Actual Cash Value). This in fact happens approximately within 2 to 3 years, depending on loan terms and depreciation. Make sure to review your loan balance annually to determine if coverage is still necessary.

How Much Will My Gap Insurance Refund Be?

Your gap insurance refund depends on how many months remain on your policy. Divide the total cost by the policy term to calculate the monthly rate and multiply this by the unused months. For example, a $500 policy with 12 unused months could refund about $250, minus any fees.

How Long Does Gap Insurance Claim Take to Pay Out?

A gap insurance claim typically takes 4 to 6 weeks to process from an insurance company. However, claims involving dealerships or lenders may take up to 90 days. Submitting required documents early, like proof of loan payoff, can help speed up the process. If you have any concerns or doubts, you can directly contact your provider for exact timelines.

Can You Cancel Gap Insurance If You’ve Made a Claim?

No, usually you cannot cancel gap insurance after making a claim. Once a claim is paid out for a total loss, the policy is considered fulfilled, and you’re no longer eligible for a refund or cancellation. Don’t forget to read your policy terms or contact the insurer for any concerns.

Can You Get a Gap Insurance Refund After a Total Loss?

No, a gap insurance refund isn’t available after a total loss. The policy’s purpose is completed when it pays the difference between the loan balance and the actual cash value. Refunds only apply to unused premiums before claims are made.

Can You Get a Refund for Gap Insurance from a Car Dealership?

Yes, you can request a gap insurance refund from a car dealership if you cancel your policy early. Simply provide the required documents, such as proof of loan payoff or a sale agreement. Refunds may take around 30 to 90 days to process and may be reduced by cancellation fees.

What Happens to My Gap Insurance If I Refinance My Car?

Refinancing usually cancels your existing gap insurance because it’s tied to your original loan. You’ll need to purchase a new policy for the refinanced loan. You can check with your insurance provider to confirm your options and ensure continued coverage.

Sources:

1. Edmunds. (2010, September 24). Depreciation infographic: How fast does my new car lose value? Edmunds. https://www.edmunds.com/car-buying/how-fast-does-my-new-car-lose-value-infographic.html
2. Statista. (2024, September 11). Share of used and new U.S. vehicles with financing 2022-2024. https://www.statista.com/statistics/453000/share-of-new-vehicles-with-financing-usa/