Gap Insurance: Read the Fine Print

A few weeks ago I wrote how happy I was with the decision to purchase gap insurance for my daughter’s car.  The insurance company evaluated the vehicle as a total loss due to damage incurred from an accident. I owed more than the market value of the car, and was told gap insurance would pay the difference. However, the letter received from the insurance company had me rethinking the value of gap insurance.

Read the Fine Print

The letter said no payout was required from the gap insurance claim due to the loan being satisfied through a clause in the terms and conditions of the policy. The paragraph references is as follows:

“Net Finance Contract Payoff”: The amount owed by You to the Lender under the Finance Contract as of the Date of Loss, less: 1.) unearned finance charges; 2) unearned insurance premiums; 3.) late charges; 4.) any delinquent payments; 5.) refundable taxes of fees; 6.) amounts due You from items which were included in the Finance Contract (e.g., credit insurance, service contracts of prepaid maintenance agreements); and 8.) the amount of Your Primary Automobile Insurance deductible over $1,000.

The one that got us was #6. An extended warranty was also purchased. Since the car was totaled, the policy was cancelled and a prorated refund was due. As per this clause in the gap insurance policy, that refund would be applied to the loan balance after the primary automobile insurance company paid the calculated market value of the vehicle. Therefore, the gap insurance claim did nothing.

To add insult to injury, the gap insurance couldn’t be cancelled for a prorated refund because the it is considered null and void after the car is totaled. At that point the policy either pays, or it doesn’t. In our case, it didn’t.

Gap Insurance Take Aways

I made mental notes of a few interesting points of how this played out:

  • The finance guy at the dealership was clueless. He had told me the gap insurance claim would pay out first.  Once that was completed the extended warranty would be canceled for the prorated refund. He even dogged me a couple times asking for proof the loan was paid off so the refund could be initiated.  If the finance people have no idea how these policies work, they have no business recommending them to car buyers on a daily basis.
  • It’s my fault I didn’t read the contract. It happens with every major purchase. You’re signing your name a bazillion times on long forms with the finance person summarizing what they mean. Read the contracts. Read them in their entirety, taking them home if you need to. Know exactly what you’re signing before putting your name on it.
  • Know when to cancel gap insurance. In many cases, such as mine, the gap insurance premium for the life of the loan is included in the financed amount. However, it can be canceled anytime. Know how to determine if you’ve paid enough on the loan, given the clauses in your gap insurance policy, that the gap insurance would no longer pay out. Ask the finance person to help you (assuming they know enough about the policy to do so). Once you reach the break even point, cancel the gap insurance for a prorated refund of the unused portion of the product.

Gap insurance may still be a good idea if you’re looking for peace of mind that you won’t get caught with a loan balance for a car you don’t have anymore. However, do not rely on finance people to give you the full story. Read the contract cover to cover, and know how to determine when the product is no longer useful. Otherwise, you may end up getting a letter in the mail just like mine.

How about You, EOD Nation, do you read the complete text of contracts you sign?

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