What is GAP insurance? And what does it cover?
GAP insurance is an optional cover that can protect you against depreciation if your car is stolen or written off. Find out more about what GAP insurance covers, how it works and how it could help you.
When buying a car there are a lot of expenses to consider. In addition to paying for the vehicle, there is car insurance and breakdown cover to pay for, not to mention the running costs involved such as petrol and servicing.
GAP insurance is another expense you may be considering. It may not be suitable for everybody, but it can be beneficial for some drivers, especially those with brand new cars and those on a car finance deal.
Although both GAP insurance and standard car insurance can help you out if something happens to your car, they are two completely separate policies. So what exactly is GAP insurance and how does it work?
>>MORE: Compare GAP insurance
What is GAP insurance?
GAP – or Guaranteed Asset Protection – insurance is a policy that you can purchase in addition to your main car insurance. It covers you financially for the difference between what you initially paid for your car and what an insurer will pay out if your car is stolen or written off.
A car is written off (a total loss) if it is unrecoverable, damaged beyond repair, or if the insurer concludes that the cost of repairing it is too high.
If your car is declared a total loss, your car insurance will only pay out the current ‘market value’ of your vehicle. This will normally be considerably lower than the price at which you purchased it due to depreciation, especially if you bought the car as new. GAP insurance will cover this shortfall or, if you purchased your car on finance, it will cover any outstanding payments.
For example: If you buy a brand new car for £20,000 and six months later it is written off, a car insurer will only pay out what it’s worth at that time, which could be £15,000. This would leave you £5,000 out of pocket. GAP insurance is designed to make up the difference, which would give you enough money to buy a brand new replacement car or to clear your outstanding car finance agreement.
How does GAP insurance work?
GAP insurance works like any other insurance policy, in that you pay a premium for your cover which will be valid for a specified length of time. If your vehicle is written off during this period and your car insurer pays out for the loss, you can then claim on your GAP insurance.
GAP insurance will only pay out when your standard car insurance provider declares the car a total write-off and when you have successfully settled your main car insurance claim.
The exact details of how GAP insurance will work and how it will make up the shortfall depends on the type of policy you have taken out.
What are the different types of GAP insurance?
The various types of GAP insurance available on the UK market can seem confusing at first, but they are actually relatively simple to understand:
Vehicle Replacement Insurance (VRI)
The policy will cover the cost of a brand new replacement car to the same specification as the one you wrote off.
Return to Invoice (RTI)
In the event of a write-off, this popular form of GAP insurance will make up the difference between the insurer’s payout and the invoiced price of the car when you bought it.
Return to Value (RTV)
This policy will cover the difference between the car insurance settlement and the value of the car on the day you took out the GAP insurance cover, as opposed to what you paid for the car.
Finance GAP insurance
This type of GAP insurance will cover the amount you still owe to the finance company. It will pay the finance company the settlement figure that will clear your debt.
What does GAP insurance cover?
GAP insurance covers the difference between the value of your car at the time it was written off (which is what the insurer will pay), and the amount you paid for the vehicle or still owe on your finance agreement.
Although the exact terms of cover will depend on the type of policy you choose and the provider you purchase it from, GAP insurance covers against depreciation, so it will protect you when the insurance payout for your written off vehicle is less than the amount that you first paid for it.
GAP insurance can cover you if:
- You have fully comprehensive car insurance.
- You have a new or used car.
- You buy your car from a dealer or private seller.
- You buy your car outright, on finance, or have it on lease.
- Your car insurer declares your car a total loss, whether that’s because of fire, theft, or an accident (at-fault or no-fault), and your claim is settled successfully.
Many GAP insurance policies will also cover the cost of your car insurance excess payment, up to a specified sum.
GAP insurance is available to cover motorcycles and vans as well as cars.
What is not covered by GAP insurance?
Details will differ between policies and providers so you should make sure you are aware of exactly what is, and isn’t, covered by your GAP insurance. Some common exclusions to be aware of are:
- Drivers with third party only or third party, fire and theft car insurance policies won’t be eligible for GAP insurance.
- You won’t be able to claim on your GAP insurance if your car insurer doesn’t pay out. For example, if you were drink-driving or used your vehicle for a prohibited purpose like racing that invalidated your policy.
- Modifications or extras, such as alloys or spoilers, added to the car after purchase will not be covered.
- GAP insurance may only cover excesses up to a certain amount.
- It won’t cover any deductions made by your car insurance provider on your main insurance payout e.g. for any unpaid premiums or contributory negligence.
- Some GAP insurance providers may have certain requirements for your vehicle, such as mileage or age limits.
Why might you need GAP insurance?
GAP insurance won’t be necessary for every driver, but for some it can be an invaluable safety net should something happen to their vehicle.
It can be useful if your car is on a leasing agreement or a finance agreement as, if your car is written off, you would still need to pay off the balance you owe to the leasing or finance provider. Your car insurance settlement would cover some of this cost, but, in most cases, not all. You would need to make up any difference out of your own pocket, unless you had GAP insurance which could clear your outstanding payments.
People who have purchased a new car that is at risk of depreciating quickly may also opt for GAP insurance, particularly if they would want to replace their written off vehicle with a brand new model. The AA found that new cars could lose up to 40% of their value in just one year, so drivers concerned about this may wish to consider GAP insurance.
If you are wondering whether you should buy this extra protection, check out our guide to help you decide if GAP insurance is worth having.
Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more