What Does GAP Insurance Cover? And Why Take It Out?

GAP insurance is an optional cover that works alongside your standard car insurance policy. But what does GAP insurance cover and why might you get it?

Rhiannon Philps 17 November 2020

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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 might 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.

GAP – or Guaranteed Asset Protection – insurance is a special type of policy that 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.

If your car is declared a total loss, your car insurance will only pay out the current ‘market value’ of your vehicle, which will normally be considerably lower than the price at which you purchased it due to depreciation. 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 6 months later it is written off, the insurer may only pay out £15,000. GAP insurance will make up the difference, thus giving you enough money to buy a new car or to clear your car finance agreement.

How does GAP insurance work?

GAP insurance works like any other insurance policy, as you pay a premium for your cover which will be valid for a specified length of time. You can choose to buy it from the dealer where you purchase your car, or look elsewhere to purchase it directly from an independent insurance provider.

The exact details of how GAP insurance will work depends on the type of policy you have taken out. However, in all cases, if your vehicle is written off or stolen and your car insurance provider pays out for the loss, then you can 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.

What are the different types of GAP insurance?

The 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. They will pay the finance company the settlement figure that will clear your debt.

What does GAP insurance cover?

Essentially, 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, this insurance covers against depreciation, so it will protect you when the insurance payout for your written off vehicle is less than what you first paid for it.

If your car is declared a total loss and you need to claim on your GAP insurance, you will need to contact your GAP insurer at the earliest opportunity, before accepting any settlement from your car insurer.

What doesn’t GAP insurance cover?

Details will differ between policies and providers so make sure you are aware of exactly what is and isn’t covered. Some common exclusions that you should check for are:

  • The GAP insurer will only pay out if your car insurer judges that your car is a complete ‘write-off’ and they have settled your claim.
  • You can only get GAP insurance if you have fully comprehensive car insurance. Drivers with third party only or third party, fire and theft car insurance policies won’t be eligible for GAP insurance.
  • Modifications or extras added to the car will not be covered. So, if you add alloys or spoilers after purchasing the car these will not be paid for in the ‘difference’ between the market price and what was originally paid.
  • 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, contributory negligence.

Are there any exclusions I need to be aware of?

Cover details will differ between policies and providers so make sure you are aware of exactly what is covered. Some common exclusions that you should check for are:

  • The insurer will only pay out if your car is stolen or your car insurer judges that it’s a complete ‘write-off’.
  • The insurer will only pay out if you have fully comprehensive car insurance.
  • Modifications or extras added to the car will not be covered. So, if you add alloys or spoilers after purchasing the car these will not be paid for in the ‘difference’ between the market price and what was originally paid.
  • GAP insurance may only cover excesses up to a certain amount.
  • Won’t cover any deductions made by car insurance provider e.g. for any unpaid premiums, contributory negligence.

What do I need to consider before taking out GAP insurance?

There are a few things to watch out for when searching for cover.

Firstly, always check the cover included with your car insurance. If you have a brand-new car, some comprehensive policies will offer new car replacement in the first 12 months of ownership, but you should check your policy’s terms as there may be exclusions.

However, even if you have this cover, you could still purchase GAP insurance when you buy your car and defer its start-date. Alternatively, you could look into taking out a GAP insurance policy after this 12-month period, although your choices of cover will be more limited if you wait.

Your car finance agreement may also have provisions to cover you for any shortfall between how much you paid and the official value of the car- removing the need for GAP insurance.

There are other things to remember when searching for GAP insurance including:

  • You don’t need to purchase GAP insurance from the dealership where you buy your car. There are lots of independent providers that may be able to offer cover at a cheaper price.
  • Depending on the type of GAP insurance policy you choose, you may have to take out cover within a set timeframe after purchasing your car.
  • If your car is leased or financed in some way, make sure outstanding charges are covered by the GAP policy.
  • Providers will often allow you to vary the maximum sum covered in the event of a claim. This keeps premiums down but might make the cover insufficient. Look to cover 50% of the car’s value on the day you take out the policy.
  • Always ensure the provider is authorised and regulated by the Financial Conduct Authority (FCA).
  • Make sure you are aware of any car insurance excess that will be covered.
  • Always check with your insurer first. If you have a brand-new car many insurers will replace the new car in the first 12 months for one of a similar age and value, reducing the need for a GAP policy until after 12 months.
  • Some GAP insurance providers may have certain requirements for your vehicle, such as mileage or age limits.

What are the main reasons to take out GAP insurance?

When you think about it, GAP insurance is essentially an insurance policy that covers the shortcomings of your existing insurance policy. It’s insurance insurance. Though this may seem ridiculous at first glance, there are three main reasons that it may be a prudent purchase for some:

Car value depreciation

It’s common knowledge the value of a car depreciates disturbingly fast – and the newer it is, the quicker it loses value. According to the AA, brand new cars lose value as soon as you drive them off the forecourt and will lose around 40% of the price you paid for it by the end of the first year. Assuming you do 10,000 miles a year, your average car will have lost 60% of its initial value by the end of the third year.

The rate of depreciation will vary from car to car and generally slows significantly depending on the age of the vehicle.

Therefore, if you want to mitigate against this depreciation, should you be unfortunate to have your new car written-off or stolen, a GAP insurance policy can make sense.

Car finance popularity

Another reason to justify the purchase of GAP insurance is if you bought your car under a finance scheme, which has become an increasingly common trend for UK motorists over the last few years.

If your car is written off before you have finished your finance term, the pay-out on your standard insurance policy will be less than the amount you borrowed (as well as the interest). So, you will be stuck paying back the finance, without having the car which it was taken out on.

In this situation, GAP insurance would be a suitable solution to cover the shortfall and it should also cover any finance charges – but check the policy.

The increasing complexity of vehicle technology has seen an increase in the number of cars designated as write-offs. A 2017 study by Churchill Insurance found 400,000 vehicles were written-off each year – that’s about one every 90 seconds on average.

Motorists buying top range vehicles with expensive parts and complex systems that are not economical to fix or replace may therefore want to consider GAP insurance as they may be more likely to be assessed as damaged beyond repair.

Is GAP insurance worth the investment?

Because brand-new cars depreciate rapidly, GAP insurance could be worth the investment for owners of these vehicles. Especially if you are concerned about the cost of replacing your car if it is written off, and if you would want to replace it with another brand-new car or one of a similar model, then you may want to consider GAP insurance as your standard insurance is unlikely to cover this expense.

If, however, you don’t mind getting a replacement second-hand car of a similar age and condition to the one you wrote off, then your car insurance is likely to cover this without the need for GAP insurance.

Those with car finance deals may find GAP insurance particularly useful, as the insurance company payout alone may not cover the finance remaining on your deal. The risk of owing more than the car’s value at the time of write-off is greater if it happens near the beginning of your agreement, or if your deposit was small and you’re making payments over a long period of time.

Drivers with PCP deals in particular may find GAP insurance worthwhile, because they would need to pay the balloon payment lump sum in addition to their remaining payments as they wouldn’t have the option of returning the car to the provider. So, if you wouldn’t be able to pay the outstanding finance yourself, GAP insurance could be worth considering.

However, GAP insurance isn’t necessarily the best option for every driver.

Before you think about getting GAP insurance, check your car insurance policy. If you have a new car, some comprehensive policies will offer new car replacement in the first 12 months of ownership. But you should check your policy’s terms first as there may be exclusions. After this 12-month period, you could then look to see if it is worth taking out a GAP insurance policy.

Similarly, your car finance agreement may have provisions to cover you for any shortfall between how much you paid and the official value of the car- removing the need for GAP insurance.

Since new cars depreciate much quicker than used cars, if you have an older, second-hand vehicle, it may not be worth getting GAP insurance as your car is unlikely to depreciate significantly in value. This means there would be little, if any, shortfall to make up between the amount you paid for the car and the insurance pay out.

Also, if you could afford to make up the shortfall between what you receive from your car insurer and the amount you need to pay off your finance or buy a replacement car, it might not be worth getting GAP insurance. If you’re not bothered about getting a brand-new vehicle to replace the write-off and you’re happy to replace it with a cheaper, used vehicle, then GAP insurance may be an unnecessary expense.

About the author:

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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