What is GAP Insurance

Everything you need to know to understand what GAP Insurance is all about

When you're going through the process of buying a new or used car from a dealership, there are lots of add-on products you'll be offered throughout the process. Obviously, the car itself is the big deal and the thing you're understandably most excited about.

Also see: Looking for more car buying advice? Find the answers to your questions

That's great and it's exactly how it should be, but it's easy to focus purely on the vehicle and just rush through these ancillary items without paying due care and attention to them. Of course, the dealership has a vested financial interest in you buying some of these additional items, but you could be seriously missing out in the long term if you don’t give careful consideration to them. Of all the add-ons you will, or at least should be offered by the dealership, GAP insurance is probably the most important.

What is it?

GAP insurance, or Guaranteed Asset Protection to give it its full title, is basically an insurance product to enhance the cover offered by your regular car insurance.

If you're unlucky enough to be involved in an accident where your vehicle is written-off, or your vehicle is stolen and not recovered, your insurance provider will usually only pay out a sum based on the current market value of your vehicle at the time. What you actually paid for the vehicle when you bought it is irrelevant, so the longer you've owned it and the more miles you've put on it, the less you're likely to get from your insurer. This is where GAP comes in.

In its simplest form, GAP insurance covers the difference between what the insurance company decides to pay out for your claim, and what the original invoice price of the vehicle was when you purchased it. For example, if you originally paid £25,000 for your car and it gets written-off by the insurance company and the current market value is £18,000, without GAP there'll be a shortfall of £7,000 between what you paid for your car and what you get as a settlement. This means you'll either have to buy a cheaper or older car than you originally bought, or you'll have to pay the shortfall yourself. However, if you took out GAP insurance when you bought your vehicle, the GAP policy will pay you the £7,000 to make up the difference.

That's Gap insurance explained in its simplest form, but read on to find out about different types of GAP insurance.

What it isn't

Knowing what GAP insurance is not is possibly as important as knowing what it is. What it most definitely is not is a replacement for normal car insurance. You absolutely must have a normal insurance policy in place or you'll get nothing from your GAP policy should you need it.

Different types of GAP

It probably won't come as much of a surprise to many that GAP insurance can be a little more complicated than we've covered so far, and this is because there are a number of different types of GAP for different circumstances.

  • If you bought your vehicle using finance and it hasn't been paid off when you have to make a total loss claim, it's to be hoped you took out finance GAP insurance. Instead of paying the difference between the insurance settlement and the original invoice price of the car, finance GAP pays the difference between the insurance settlement and the outstanding finance, if the settlement is less than the amount outstanding on the finance. Many providers will offer finance GAP as part of a return to invoice GAP policy. Think of it as GAP insurance on your finance more than on your car.
  • Next up is vehicle replacement GAP, which covers the difference between the insurance payout and the price of purchasing a brand new replacement, which is likely to be more than you paid for your original car. Finance GAP may also be included as part of a vehicle replacement GAP policy if you're buying on finance.
  • Return to value GAP is very similar to return to invoice GAP, except it pays the difference between your insurance payout and what the car was actually worth when it was first purchased. This is particularly useful if you bought your car second hand, or if you've had it for some considerable time by the time you make a claim.
  • Lease GAP probably used to be the rarest form of GAP insurance, but that's changing as leasing and personal contract hire agreements are becoming increasingly popular. What lease Gap does is to fully pay up your agreement and cover any additional fees which may be incurred if your car is written off. It won't put you in a new car, but it will leave you free of any outstanding payments so you can get another vehicle without any financial carry over resulting from the old one.

What you need to know

Like any insurance policy, GAP policies have their limits. The maximum payout amount will be set when you purchase your policy, and it's very much up to the insurance advisor to explain the different policies available to you. After all, there's no point buying a return to invoice GAP policy with a maximum payout amount of £25,000 if you're buying a used car costing £12,000, is there?

Pros of GAP insurance

  • One-off payment No annual renewals or price increases
  • Excellent for expensive vehicles Often with heaviest levels of depreciation
  • Financial peace of mind One less thing to worry about in event of a total loss
  • Affordable Price Based on policy value, not on risk

Cons of GAP insurance

  • Cost Although relatively affordable, still represents an additional cost
  • Non-transferable Policy ends if car is sold, cannot be transferred like a warranty can
  • Time limits Cannot be purchased if you bought your car more than one year ago
  • Restrictions Vehicles above certain ages and mileages may not be eligible

The first thing you're likely to ask yourself when you're offered GAP at the time of purchasing your exciting new car is, "do I need GAP insurance?" The truth is only you can answer that question for yourself. If you're lucky enough to be so wealthy the cost of a car is little more than pocket change to you, it's unlikely you'll be desperate to buy a GAP policy. Even then, a policy would deliver the same financial benefit to you as it would to anyone else if you had it, of course. However, if you're like the majority of people and purchasing a car is probably the second most expensive thing you're ever likely to buy, it's definitely worth looking into.

Let's be honest here; it's easy to say no to add-ons when you're agreeing to buy a new vehicle as you're already going to be paying out a considerable amount of money. After all, you've also probably decided you need to buy a set of mats, mud flaps and maybe other accessories such as a dog guard, so where does it all end?

If there's one add-on you should give serious consideration to though, it really should be GAP insurance. Just imagine how you would feel if you suffered a total loss and found yourself thousands of pounds worse off than you would have been if you'd bought GAP. It may not be the most exciting purchase you'll ever make, but it could turn out to be one of the best. Most people have never had their vehicle written-off after an accident or had it stolen and not recovered, so it's easy to think "It'll never happen to me." The truth is that it does happen to lots of people every day, and if you have a car, it could be you one day.

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Disclaimer: This page is intended to provide information only, it is not, and should not be taken to be advice or an offer of credit. The information is subject to change without notice. Every effort has been made to ensure the accuracy of the information on this page and manufacturers or dealerships may vary the products or specifications of the products they offer. For full terms and conditions contact the relevant manufacturer or your local dealer. Imagery is a visual representation and may not represent the exact products. Please ensure you can afford the monthly payments before signing any contractual agreement. You will not own the vehicle until all payments have been made. Any finance or offers mentioned are not available in conjunction with any other offer and may be varied or withdrawn by the manufacturer or dealer at any time.

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