If you have car insurance and your car ends up written off or stolen, then you’ll be able to claim back the cost of the car from your insurer. However, there’s no guarantee that your insurance provider will pay you the same amount for your car as the amount you originally paid for it. That’s because many car insurance providers will only pay out your vehicle’s current market value. This is where GAP insurance comes in.
What is GAP insurance?
GAP insurance is a type of insurance that covers the difference between the amount of money your insurance provider will pay you in the event your car is written off or stolen and the amount of money you will need to spend to buy a new or equivalent model.
GAP is also an acronym for guaranteed asset protection. The asset, in this instance, is your car, and the protection refers to the financial cover of the depreciation of the vehicle.
Essentially, if a car is written off or stolen, a person will make a ‘total loss’ claim. In this instance, the insurance provider will often pay the owner of that vehicle the going market rate for that car. This can leave the owner out of pocket, particularly when you consider that cars often drop in value at a considerable rate in the first few years of ownership.
GAP insurance will essentially cover this drop in value.
So let’s use some figures to explain how GAP insurance works. If you purchased a car for £40,000 and it is written off in the first 12 months, your insurance provider may only pay you £35,000 as a ‘total loss’ settlement. However, if you have ‘return to invoice GAP insurance’, you can expect to receive the full £40,000 as a ‘total loss’ payment.
This is only generally speaking, as there are a number of different types of GAP insurance that work in different ways.
GAP insurance on used cars
GAP insurance is genuinely considered to be most valuable to people purchasing brand new cars that are on the pricier end of the scale. This is because it is these cars that stand to drop by a higher value than used cars. However, GAP insurance is still available for used cars. And, despite it not necessarily being as important when buying used vehicles, if someone wants to purchase GAP insurance, they can.
Older vehicles often drop in value at a much slower rate than brand new cars, meaning the gap between the ‘total loss’ payout on a standard policy and a GAP policy might not be that large, making the policy less important.
It’s also worth noting that if you are buying a relatively new used car, that value may still continue to drop, meaning a GAP policy might be worthwhile.
Is GAP insurance worth it?
Deciding whether to take out GAP insurance is entirely up to you. However, there are a few things you want to consider when making your mind up. While not a necessity, it’s important to evaluate whether the cost of this add-on is justified by your circumstances.
As outlined, GAP insurance is not strictly essential. Your standard car insurance policy should provide compensation for a replacement vehicle of similar age and condition to the one you’ve lost. In theory, this means you won't be left out of pocket. However, the reality can be a little more complicated. Many drivers report feeling short-changed by what their insurer pays out, especially when it falls short of clearing remaining finance on the vehicle.
To help you make an informed decision, we’ve broken down when GAP insurance might be beneficial and when it’s not.
When GAP insurance might be useful
- If you want a new car replacement: For some, the appeal of a brand-new replacement car after an accident or theft is too strong to ignore. If you’ve splashed out £30,000 on a new car, and it’s written off just 15 months later, your insurer will only cover the current value of the vehicle. While this is enough to replace your car with something of a similar age and condition, if you're set on a brand-new model, the payout might feel insufficient. In this case, GAP insurance could cover the difference, ensuring you're not left with a shortfall.
- Outstanding finance: GAP insurance can be a lifesaver for drivers who have financed their vehicles. Without gap insurance, you may still be on the hook for the remainder of your loan, even though you no longer have the car. GAP insurance, however, can cover that gap - effectively clearing the finance for a car you no longer possess
When you probably don’t need Gap insurance
- You don’t mind a used replacement car: If you’re comfortable with your insurer providing a car that’s a like-for-like replacement, GAP insurance is probably unnecessary. In such cases, the amount your insurance pays out will likely be enough to get you back on the road, and the additional expense of GAP insurance therefore won’t be warranted.
- Your car is less than a year old and you have comprehensive coverage: Many fully comprehensive car insurance policies come with a ‘new car replacement’ clause, which will typically run for the first 12-24 months of ownership. This means if your car is within that window and is written off or stolen, the insurer will replace it with an identical new model. If this is the case, you will not need to purchase GAP cover.
- If you’re buying a used car: Gap insurance is generally less valuable for owners of used cars. As we previously mentioned, a used car’s value doesn’t drop in such a steep curve, meaning the difference between what you paid for the car and what the insurer will pay out is typically smaller. This tends to make GAP insurance less relevant. That said, some used car buyers still opt for it, particularly if they’ve financed the purchase.
How long does GAP insurance last?
Generally speaking, you can take a GAP insurance policy out for between one and five years. This is often to cover the length of a standard finance agreement. If you’re financing a vehicle, then you’ll usually want to make sure that your GAP insurance policy covers the full duration of your finance term.
When does GAP insurance not pay?
As with almost all insurance policies, there may be cases where a GAP insurance policy may not settle. All insurance policies will have terms and conditions that must be met in order for a payout to be agreed upon. And in some cases, certain situations may arise that lead to a policy not paying out.
First, if your main motor insurer refuses to pay out, the GAP cover will not be triggered. This could happen if you're negligent, such as leaving the keys unattended, or if you were driving under the influence or using the vehicle for excluded activities like courier work.
You also need an “insurable interest” in the vehicle to claim on a GAP policy. This means that if the vehicle is in someone else’s name, you won’t be able to claim. Additionally, most policies don’t cover vehicles used for commercial purposes, like taxis or driving school cars.
If you stop paying your premiums, or if the vehicle is sold or ownership is transferred, your cover could end automatically. GAP insurance only covers one claim per vehicle, and once you’ve claimed, the policy ends.
Lastly, if your policy expires, if there’s no "gap" to fill, or if your vehicle isn’t listed in the Glass’s Guide, your claim could be denied.
Types of GAP insurance
There are generally considered to be six main types of GAP insurance. They are listed below.
Return to invoice GAP insurance
This policy tops up your insurance payout to the original price you paid for the vehicle. It’s particularly beneficial for new car buyers who want to ensure they aren’t financially impacted by depreciation.
Return to value GAP insurance
Return to value GAP insurance covers the difference between your insurer’s payout and the value of the car when it was first purchased. Unlike return to invoice, this focuses on the original purchase price rather than the current market value, making it ideal if you’ve owned the car for a while but still want compensation based on its initial value.
Vehicle replacement GAP insurance
If you want to replace your car with a brand-new model, vehicle replacement GAP insurance is for you. It covers the difference between your insurance payout and the cost of a new car, ensuring that you’re not left with a used replacement. This is perfect for those who prefer to drive a new vehicle rather than one of similar age and condition to the one they have recently lost.
Finance GAP insurance
For those who’ve financed their car, this form of GAP insurance ensures that any outstanding loan balance is paid off if the car is written off. While it covers the remaining debt, it typically doesn’t cover additional fees or interest, so it’s mainly useful for people with car loans who don’t want to be stuck paying off a vehicle they no longer own.
Negative equity GAP insurance
Negative equity GAP insurance protects you if you owe more on your car loan than the car’s current market value. If your car is written off, your insurance payout might not cover the full amount left on the loan. This policy steps in to cover the shortfall, ensuring you’re not left paying off debt for a car you no longer have.
Lease GAP insurance
Leasing a car comes with the risk of owing more than the car’s value if it’s written off. Lease GAP insurance covers the remaining lease payments and any early termination fees. It ensures that if your car is stolen or written off, you won’t be left with expensive penalties and can walk away without financial strain.
Conclusion
So there you have it, GAP insurance can be a supremely useful policy to take out for certain car owners. But, just like with regular car insurance, it’s important you do your research and compare GAP insurance policies online to find the most affordable option for you. Shopping around helps ensure you get the best deal, but it’s important to go beyond just the price. Before purchasing any policy, make sure to check the key features carefully.
Some of the key factors to look out for include the length of the policy, as you want to make sure it fits your needs for the right amount of time. The policy’s excess is also crucial, and you’ll want to be sure to understand any significant exclusions, too - there may be circumstances where the policy won't cover you.
If you have any questions about GAP insurance, then don’t hesitate to reach out to our team here at Plympton Car Centre. Our dedicated staff are on hand to answer any questions you may have!
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