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GAP insurance, an acronym for Guaranteed Asset Protection, safeguards vehicle owners in uncertain situations. In the unfortunate event a car is stolen or deemed a total loss, standard car insurance will typically only cover the car’s current market value, which can be substantially lower than the original purchase price. This is where GAP insurance steps in, covering the difference between the original purchase price of the car and the amount your insurance provider pays out. In essence, it ensures you’re not left with a financial gap in such adversities.
Cars are among the most rapidly depreciating assets you can own, especially if you’ve bought a brand new car. According to the AA, the moment you drive it away from the forecourt, its value plunges by a third, and over the next three years, it drops a further 60 per cent on average.
If your car is stolen or declared a total loss, the insurance payout typically reflects its current value – less than its initial purchase price, particularly for new vehicles. Consequently, when replacing the car, a financial ‘gap’ emerges between the insurer’s payout and the cost of obtaining that same car, or a comparable new model.
A GAP insurance policy bridges this financial disparity. It covers the gap between what your car insurance pays out and the actual replacement cost of your vehicle.
For example, if you purchased a car for £15,000, and later, when its value has fallen to £8,000, it gets stolen, your standard car insurance would compensate you the car’s current value – £8,000. However, with GAP insurance, you’d receive an additional £7,000, bridging the deficit. This ensures you can afford a new vehicle equivalent to the initial price of your previous one.
If you acquired your car through a car finance arrangement, GAP insurance will settle any outstanding balance, ensuring the loan is fully paid off.
GAP insurance policies typically last two to five years and tend to be standalone, unattached to your standard car insurance. Many car insurers provide a ‘new car replacement’ feature. If your new car is stolen or written off due to an accident within the first year, they’ll replace it with a comparable model, making GAP insurance redundant for the first 12 months.
Your policy should be acquired within a year of purchasing your car. However, some providers allow you to postpone your coverage to the second year, letting you lean on the new car replacement benefit for the first year.
GAP policies can be purchased from comparison sites, such as Money SuperMarket, specialist brokers and car dealerships. However, it’s important to note that dealers cannot sell GAP insurance simultaneously with a car. A minimum of two days between receiving a GAP insurance quote and the actual purchase must elapse. If a dealer offers a quote, use this interim to shop around, as you might find more competitive rates elsewhere.
There are several types of GAP insurance, depending on the specifics of what you wish to cover.
Return to invoice (RTI) covers the difference between the insurance provider’s value of the car at the time of the loss and the vehicle’s original purchase price. It aims to return you to the financial position you were in before you purchased the vehicle. RTI cover is typically the cheapest GAP option.
Return to value insurance covers the difference between the insurance payout and the car’s value at the time you took out the GAP policy. It’s beneficial for those who bought their vehicles second-hand or have had them for a while before deciding to take out GAP insurance.
Specifically designed for those with outstanding finance on their vehicle, finance GAP insurance covers the gap between the insurance payout and the remaining balance owed on a vehicle finance agreement.
This policy blends return to invoice and finance coverage. Your insurer will compensate for the greater amount, be it the initial purchase price of your vehicle or the remaining balance on your finance agreement.
If you have a car finance deal and owe more than the car’s value at the time of claiming, it’s covered by negative equity GAP insurance.
Vehicle replacement GAP insurance covers the difference between the insurance payout and the cost of a brand new vehicle of the same make, model, and specification. It’s beneficial when vehicle prices have increased since your original purchase.
Tailored for leased vehicles, this insurance pays the difference between the insurer’s payout and the amount required to settle the lease or contract hire agreement. This can also include any outstanding rental amounts.
As with any insurance policy, it’s essential to understand the level of coverage you’ll receive.
Generally, GAP insurance is acquired within a year of purchasing your car. Various GAP policies are available, each tailored to cover specific financial concerns related to your vehicle’s loss, whether addressing outstanding car finance or financing a replacement vehicle.
Always shop around and compare prices and terms from different providers. This ensures you get the best rate and the most suitable coverage.
Your coverage stays in effect as long as you maintain your payments. You can only purchase GAP insurance if you have comprehensive car insurance, so this covers most scenarios involving theft, loss, or vehicle damage.
If you need to make a claim, contact your primary insurance provider and have your claim approved. Once approved, and before accepting any settlement offer, contact your GAP insurance provider. They may need to agree to the offer before you accept.
Once you’ve accepted the offer, there’s often a timeframe within which you need to file a GAP insurance claim. If your GAP insurance encompasses finance, it’s prudent to discuss the resolution of any remaining loans and determine whether they’ll be directly settled on your behalf.
GAP insurance costs can vary considerably based on several influencing factors, which include:
Where you buy your GAP insurance can also be a contributing factor to its cost. A franchised dealership typically charges over 60 per cent more than a GAP insurance provider, with cover costing an average of at least £100 for a fixed three-year policy.
You may find purchasing gap insurance more cost-effective through a comparison website.
There are several ways to obtain cheaper GAP insurance. These include:
While you’re not obligated to purchase GAP insurance, many car owners find it offers invaluable peace of mind. If your new car is stolen or declared an insurance write-off, standard car insurance may only cover its current market value, which could be significantly less than the original purchase price. GAP insurance covers this, ensuring such events do not financially strain you.
Moreover, GAP insurance gives an added layer of protection for those who’ve bought their cars on finance. If you make an insurance claim, the market value payout from your regular car insurance might fall short of covering the outstanding amount you owe on your finance agreement. GAP insurance would cover these outstanding lease payments, preventing additional financial burdens during stressful times.
Whether GAP insurance is worth it for an older car largely depends on the specific circumstances. As a vehicle ages, its rate of depreciation slows down. Consequently, the gap between what you owe on the car – if you still have an outstanding loan – and its current market value narrows.
GAP insurance may not be as beneficial for drivers who own their older vehicles outright since there’s no outstanding loan amount to cover. The payout from a standard insurance policy in case of a total loss might be relatively close to the market value of the older vehicle.
You are not legally required to take out GAP insurance on a leased car. However, it might be strongly recommended by the leasing company due to the benefits it offers. When you lease a car, you are responsible for the vehicle. Any financial loss suffered by the leasing company due to theft or damage can be passed on to you.
Typically, once a GAP insurance claim has been made and approved, the policy is considered fulfilled and thus terminates. This means you can only make one claim on your GAP insurance policy. If you subsequently get a new or replacement car and desire similar protection, you must purchase a new GAP insurance policy.
GAP insurance is often considered more beneficial for new cars due to the rapid depreciation within the first few years of ownership. When you drive a new car away from the dealership, its value can drop significantly, sometimes by thousands of pounds, almost instantly.
However, while new cars experience the steepest depreciation curve, even older cars can depreciate at a rate that might make GAP insurance worth considering, especially if the vehicle has a substantial outstanding finance amount. The benefits might be more limited for older cars, as their depreciation rate slows. Therefore, the potential gap becomes smaller as the car ages.
