What formula do auto dealerships use for Gap insurance refunds?

Answer 1

The answer depends on the state where Gap was purchased. In many states the refund is calculated pro rata. This means if a cancel is requested in month 30 of a 60-month loan, 50% of the selling price would be refunded. Perhaps the most popular refund calculation is rule-of-78s. This allows the Gap Insurer to earn more of the premium in the early stages of a loan. For example, in Rule-of-78s calculations the first month of a 60-month loan is worth approximately 3.28% of the overall price charged (this number would be only 1.66% if pro rata was used). Rule-of-78s is often used because it allows the Gap Insurer to more closely align the risk with the earning of premium. Gap exposure is higher early in the loan and decreases as payments are made.