When buying a new car it’s likely that the dealer will try to offer you GAP insurance. Those two words alone are confusing enough, but there are also many restrictions and important things you need to consider before signing on the dotted line.
To try and make it easier to understand and to help you decide if GAP insurance is right for you, we’ve put together this useful guide so you’re armed with the facts .
What is GAP insurance?
GAP - or Guaranteed Asset Protection - is a type of insurance often sold alongside finance deals when buying a car. It covers the difference between the value of the car at the time of purchase and the amount of the insurance settlement in the case of a write-off to prevent you being out of pocket.
Usually GAP insurance will either pay the difference between your insurance settlement and your outstanding finance, or pay back your original purchase price or replacement cost, whichever is the higher amount.
Why do you need GAP insurance?
Even if your car insurance policy is fully comprehensive, you can still lose money if your new car is written off. Cars depreciate, especially when bought new, losing as much as 60 percent of their value in the first three years.
GAP insurance will protect you against the financial risk of receiving payment based on the current, rather than original purchase, value of the car.
Imagine you buy a new car on finance for £12,000. After a year’s ownership you are involved in an accident and the car is written off. The ‘book' price for the car is now £8,750, so that could be the amount your insurance company will pay out. However, what if you bought the car on a finance deal which has more than £10,000 outstanding? You'd lose money. This is what GAP insurance protects against.
You could especially be at risk if you paid a small deposit on your finance, if your repayment term is longer than three years or the car you bought loses its value quickly.
Does GAP insurance only cover brand-new cars?
Although GAP insurance is more relevant to people buying a new car, any car under 10 years of age from a registered dealer can be covered.
There are three main types of GAP insurance:
- RTI (return-to-invoice) insurance is designed to top up the payment from your car insurance so that you get back exactly what you paid for the car.
- Finance shortfall insurance ensures that you don't have any finance outstanding on your written-off car after you make a claim. However, it differs from RTI in that it doesn't give you any money back, it only covers outstanding finance.
- New car (or ‘vehicle replacement’) GAP insurance makes sure you get your money back plus a bit more, so you can replace your car for a new one of the same model and specification. It’s usually the most expensive form of GAP insurance.
When is GAP insurance not needed?
Most fully comprehensive car insurance policies offer ‘new car replacement’ during the first 12 months of ownership so GAP insurance would not be needed here. Make sure you read the small print, though, as there may be some exclusions, for example if the car has been stolen or an accident has occurred which was down to driver error.
Some finance plans cover you for any shortfall if a write-off was to happen, so it’s worth checking the terms and conditions.
You may also consider GAP insurance a waste of time if your vehicle has been heavily discounted or it’s an older car which is depreciating at a much slower rate.
Important things to remember about GAP insurance
- You need to have a fully comprehensive policy and your insurance claim needs to be settled before GAP insurance can be paid.
- Your car needs to have been labelled a complete write-off for you to be eligible to claim.
- Before taking out a policy it's important to understand exactly what you’re paying for and what you'll get if you need to claim.
- GAP Insurance won’t cover amounts deducted by your main car insurance provider if they reduce your payout because of unpaid premiums or negligence.
- It usually won’t cover any non-standard extras that you add to the car after you bought it, for example sat-nav or upgraded alloys.
- Some policies have to be bought within 180 days of purchasing the car. While this can effectively mean a duplication of cover in the first year if buying new (or part of it), not purchasing the cover within the specified timescale could leave you without cover beyond the first year.
Where to buy GAP insurance
In a lot of cases GAP insurance can prove a useful addition to a finance agreement as it protects you against losing money because of stingy payouts from insurance companies.
But you don’t have to buy it in the dealership or as part of your finance package, there are plenty of comparison sites and providers available online - it’s almost always cheaper to buy it separately too.
Watch out for a salesman adding it to the finance agreement without checking whether you want it or not.
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