Gap insurance is a common add-on that you might be offered when signing the paperwork at the dealership. If you are wondering what gap insurance is all about and whether it is worth getting, here’s a useful guide.
What is gap insurance?
It’s a disheartening fact that a brand new car starts depreciating in value the moment you drive it off the forecourt.
According to the AA, after just three years, the average car will only be worth 40% of its original value. So, if you buy a car worth £15,000 right now, it will only be worth around £6,000 three years later.
If your car was to be stolen or written off (because of an accident or fire), your car insurance provider would pay you what it assesses the car to be worth at the time.
Unfortunately, this amount is often not enough to fund the purchase of an equivalent brand new car. It is also unlikely to be sufficient to pay off what you owe on your car finance deal.
That’s where gap (guaranteed asset protection) insurance comes in.
Gap insurance covers the difference between the current value of your car (i.e. your insurance payout) and the amount you paid for the car initially or the amount you owe on your finance deal.
Is gap insurance worth it?
The answer to this question will depend on your personal situation. Having said that, there are some scenarios in which gap insurance might be worth it. These include:
- You risk owing more than the car is worth – this can happen, for example, if you:
- Are paying a lot of interest
- Own a car that loses value quickly
- Made a very small deposit on your car finance deal
- Have a finance deal or loan spread over a long period of time, say five years
- Are leasing the car on a contract hire basis
2. You want to ensure you can replace your car with an equivalent brand new one.
At the same time, you probably don’t need gap insurance if:
- Your car is less than 12 months old and you have comprehensive insurance – if your car is stolen or written off in the first year of ownership, most fully comprehensive car insurance policies will offer you a brand new replacement vehicle.
- You would be content with a like-for-like replacement car and not a brand new one.
- You can afford to pay for any shortfall (i.e you can afford to top up the insurance payout to buy a brand new car or pay what you owe on your finance deal).
- Your finance agreement covers the ‘gap’ already.
- Your car is not a brand new model – while brand new cars depreciate in value very quickly in the first few years, the rate of depreciation eventually slows down. The value lost through depreciation in a used car may be so little that it’s not worth taking out gap insurance.
Types of gap insurance
There are several types of gap insurance covers. Here are the three main types.
1. Finance gap insurance
This covers the outstanding balance you may have on your finance deal and the payout from your insurer. While this might make you debt free, it means that you will be left with no cash and no car.
2. Return to invoice insurance
This form of gap insurance covers the cash gap between what you initially paid for the car and the payment you get from your car insurer.
3. Vehicle replacement gap insurance
Rather than just covering the difference between what you paid for the car and the insurance payout, this insurance actually helps cover the distance between the payout and the costs of replacing your old vehicle with an equivalent one of the same model and specification.
The payout here is a little more than return to invoice insurance so as to compensate you for rising car costs. However, due to the higher payout, you’re also likely to pay higher premiums for this type of gap insurance.
Are there any exclusions?
When buying gap insurance, read the small print carefully to identify any exclusions. Your gap insurance policy may not cover you if: may not pay out if:
- Your car is badly damaged but not labelled as unrecoverable or a total write off
- You don’t have fully comprehensive insurance
- Your insurer has not settled your claim fully and in your favour
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