How to Calculate a Gap Insurance Refund

If you have an accident while you still owe payments on your car, you can lose money. The damage amount may exceed the amount due to pay the vehicle off, especially if you total the car within a year or two of purchasing it. To protect consumers, insurers now offer gap coverage to take care of the "gap" between what you owe and what your insurance company will pay out for the vehicle. But sometimes a borrower pays off a loan in full well before the gap insurance expires. When that happens, you may be due a refund for the premiums you won't be using. It's important to pay close attention to the insurer's refund policy before signing up for gap insurance.

How to Calculate a Gap Insurance Refund
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Getting a Refund

When you purchase a new car, its value drops an estimated 11 percent as soon as you drive it off the lot. One year later, it will lose another 20 percent on average. On a $20,000 car, that means you'll lose $2,200 the first day and an additional $4,000 by the end of the first year. The problem is, you'll still owe every dime of that $20,000 on your car loan, plus interest and fees, even when the insurance company will only pay $13,800 if an accident causes a complete loss. Gap insurance is designed to cover that extra $6,200 so you don't lose money.

But if, like many car buyers, you pay off your vehicle within the first years of ownership, you won't need that gap insurance anymore. The policy typically automatically expires after a set period of time, but you also may have the option to end it early. You'll merely need to show proof that you've paid off the loan, then ask for the refund of all premiums due.

Calculating the Refund

The first step once you've paid off your vehicle in full is to review your policy. What did the insurer promise to do if you paid off your loan early? If you live in Alabama, Colorado, Indiana, Iowa, Maryland, Massachusetts, Oklahoma, Oregon or South Carolina, your state requires insurers to refund the premiums. Otherwise, you can contact your state commerce department if your insurer refuses to issue a refund.

To determine how much you're due, look at the price you paid for the insurance, then divide it by the number of months it covers. For example, if you paid $1,000 for 36 months of insurance coverage, the monthly amount would be $27.78. If you paid the car off at the end of 24 months, you would have 12 months remaining, which means a refund of $333.36 for the time you didn't use the coverage.

Gap insurance serves a valuable purpose, but it's important to make sure you aren't paying for a service you don't need. If you pay off a car loan early, remember to cancel the gap insurance soon afterward and request a refund in the exact amount of the premiums for coverage you won't be using.