When Should I Cancel My Gap Insurance?

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Getting a new car is always exciting—though you've probably also accepted the reality that a car is a depreciating asset—as soon as you drive your new set of wheels off the lot, the value will go down. 

If you're financing your vehicle with a loan, you may find yourself in a tricky situation if your car is ever totaled or stolen. Your regular insurance policy will only cover the actual cash value of the car at the time it was damaged or taken. If you owe more than this amount on the car loan, you would have to pay the difference out of pocket. 

That's where gap insurance comes in handy. Gap insurance is an insurance coverage option that covers the gap between what you owe on your car loan and what your vehicle is worth. While optional, the insurance may be required if you’re financing your vehicle through a bank or credit union.

But there will come a point when you no longer need gap insurance coverage. Knowing when that time is can save you a lot of money. Make these considerations to determine when to cancel gap insurance.

Gap insurance is often required by a lender if you’re financing your vehicle through a bank or credit union.

Determine How Much You Owe on Your Vehicle

Knowing the loan balance on your vehicle is crucial to evaluating when to cancel gap insurance. Review your payment information or contact your lender to find out how much you owe on your vehicle.

As long as you're still "upside down" on your loan—that is, what you owe exceeds the actual cash value of your vehicle, it's useful to keep your gap insurance to cover the difference in the event you damage or total your car. The lower your down payment, the more likely it is that you have negative equity, and the more beneficial gap insurance is. Borrowers who made a down payment of less than 20% on a car stand to gain the most from gap insurance.

But when your loan balance is less than the cash value, gap insurance is no longer useful and it makes sense to cancel it to avoid the insurance premium costs.

If you only owe a little on the vehicle, consider setting aside this money in a savings account rather than continue to pay for gap insurance. You can even use the savings to fund your next car.

Know What Your Vehicle is Worth

Determine the actual cash value of your vehicle so that you can compare what you owe against what your vehicle is worth. Each insurance carrier may use its own formula for computing the actual cash value of a vehicle. This means that they won't necessarily use Kelley Blue Book to determine the value, although you can use this free resource to get a ballpark estimate of your vehicle’s worth.

Input your vehicle's information as accurately as possible. Then, select “Buy from a Private Party” to give you the most accurate calculation. Don't assume the number listed in Kelley Blue Book is the concrete number you will receive if your vehicle is totaled.

Consider canceling your gap insurance coverage when you owe $1,000 to $2,000 dollars less than what Kelley Blue Book lists as your vehicle’s value. Typically, once you meet this threshold, the difference between what you owe and what the vehicle is worth will continue to grow steadily. It's not impossible to still come up short in a total loss, but the difference ought to be manageable (and potentially cheaper than the cost of keeping gap insurance coverage).

Most cars use 20% of their value within the first year of ownership.

Factor in the Loan Term

Generally, the longer the life of your loan, the longer you will need gap insurance. Paying a loan off over a longer period of time means that you might not “catch up” to your car's value after depreciation. This is why those financing their cars over a period of five years or more are the best candidates for gap insurance.

Paying a loan off more quickly will generally mean you’ll need gap insurance for a shorter amount of time. Most people owe less on their car than what it's worth within two years after the purchase, making this the ideal time to cancel gap insurance.

Consider Extras You Financed With Your Vehicle

If you rolled a previous vehicle's debt or loan into your current auto loan, gap insurance generally doesn't cover that carry-over debt. The same goes for extended warranties that are rolled into the loan. Remember: The purpose of gap insurance is to cover the cost of the vehicle. If that's not your primary need, it may be time to cancel your gap insurance.

Assess Gap Insurance Costs

If you're on the fence about when to cancel gap insurance, also factor in your insurance premiums and your ability to pay them. You can usually get gap insurance as an add-on to a collision insurance policy that only adds around $20 to your annual premium.

While gap insurance usually lasts for the life of the insurance policy, the likelihood of using the coverage is not all that great, making it inexpensive. But the low price can add up over time, so if you're not using it, it makes sense to cancel it to save that money for other purposes.

Cancel Your Gap Insurance

If you believe your gap insurance is no longer necessary, contact the insurance company through which you purchased it for steps on how to cancel the gap insurance. You may need to fill out paperwork to request the removal. In some cases, particularly if you purchased your car a few months ago, you may be eligible for a refund. Read the terms of the contract before you contact your insurer to determine how much, if any, you could lose.

The Bottom Line

While you can consult your insurance agent to determine whether you still need gap coverage, you can easily compare what you owe against your vehicle's worth and make the other considerations above to decide when to cancel the coverage.

Gap insurance is generally only worth it when you owe more on your car than its actual cash value. When you owe less than the car is worth, you're for the most part directing dollars toward an insurance policy from which you can't benefit.

Article Sources

  1. Insurance Information Institute. "Buying a New Car or Truck? Consider Auto Insurance Costs and Protect Your Loan When Trading Up." Accessed June 2, 2020.

  2. Insurance Information Institute. "What Is Gap Insurance?" Accessed June 2, 2020.

  3. Nationwide. "Gap Insurance." Accessed June 2, 2020.

  4. Texas Department of Insurance. "Do I Need Gap Insurance for My New Car?" Accessed June 2, 2020.

  5. Travelers Insurance. "Loan/Lease Gap Insurance." Accessed June 2, 2020.

  6. Progressive. "What Is Gap Insurance?" Accessed June 2, 2020.

  7. American Family Insurance. "Can I Cancel Gap Insurance From a Dealership?" Accessed June 2, 2020.