GAP Insurance Explained

GAP insurance is a regulated financial product that is typically offered by car dealerships during the process of buying a new car from them.

It has many benefits, particularly if you are ever unfortunate enough to be involved in an incident where your car becomes a total insurance loss, either through fire, theft, or a collision on the road.

In this article, we discuss:

• What is car GAP insurance?
• How does GAP insurance work?
• What are the different types of car GAP insurance?
• Is GAP insurance worth it?
• What cars are excluded from GAP insurance?
• How much does GAP insurance cost?
• How to make a GAP insurance claim
• Frequently asked questions about GAP insurance

What is car GAP insurance?

GAP Insurance – or Guaranteed Asset Protection Insurance – covers the difference (or “gap”) between the total value of your vehicle and the depreciated amount your regular insurance pays out in the event of a total loss as the result of an accident, fire or theft. This is also known as an insurance write-off.

Because vehicles typically depreciate over time, the difference between the price you paid for a car 2 years ago to what an insurer will pay out today if it was written off, can be substantial.

GAP insurance covers the difference between these two figures, leaving you with the budget to purchase a car for the same amount as you did originally. Different types of GAP insurance cover different circumstances.

How does GAP insurance work?

GAP insurance is not a stand-alone policy but works with your customary vehicle insurance. It’s special cover that minimises your financial loss in case of things such as theft or irreparable damage.

For instance, if your car is written off after a collision, your regular car insurance – which you’re legally obliged to have when owning a car in the UK – will only pay out the amount of your vehicle’s value at the time of the incident.

Should this unfortunate event happen three years after buying the car, you can lose as much as 60% of its original value – more than half of what you paid for it.

Without GAP insurance, you can either buy a car to the value of the insurance payment or front the difference out of your own pocket and buy something similar to what you had. With GAP insurance, you won’t have to worry about this deficit as the policy covers the value depreciation difference or.

For example, if you bought a car for £20,000 three years ago and it’s stolen, the market value in present time – and what your regular insurance will pay out – could be around £8,000. The GAP insurance policy would pay you the remaining £12,000 – restoring your budget to the original invoice price.

What are the different types of car GAP insurance?

You can choose from five different types of GAP insurance. Each provides different cover for different circumstances.

Return to invoice GAP insurance

Return to Invoice (RTI) GAP insurance offers comprehensive protection. In case of the total loss or theft of your vehicle, it pays out an amount equal to what you originally paid (as per the invoice).

Finance GAP insurance

You can get finance GAP insurance if you bought your vehicle through a finance agreement other than a lease or contract hire agreement. These include things such as a hire purchase, lease purchase, or personal contract purchase (PCP). Here, GAP insurance covers the deficit between the car’s market value and the outstanding balance on your finance agreement.

Return to value GAP insurance

Return to value (RTV) GAP insurance bridges the shortfall between the settlement amount paid by your regular insurer and the present value of the vehicle. So, it covers depreciation in the event of total loss.

Vehicle replacement GAP insurance

If you want to cover all the bases, vehicle replacement GAP insurance (VRI) is the most comprehensive cover you can get. It offers extra protection and covers the cost of a brand new car in the case of total loss.

This means VRI pays the difference in price between your regular insurance settlement and a new car. It still covers your loss, even if the sales price of the relevant vehicle increased.

Negative equity GAP insurance

Negative equity GAP insurance covers your equity debt on a financial agreement. This means it pays out the outstanding amount on your loan should you’re car be written off before it’s fully repaid.

Is GAP insurance worth it?

If all you want out of your insurance is to replace your car with something similar – that is the same condition and age – then GAP insurance isn’t necessary. But, should you want a brand new replacement or purchase your replacement through some finance agreement, GAP insurance is worth it.

It ensures you don’t find yourself in a situation where you still pay off a car that’s been written off by your insurance company. Although not legally compulsory, GAP insurance settles debts on a written off car, so you’re financially able to purchase a new one.

GAP for cars on finance

When buying a car on finance, GAP insurance works like a safety net. Let’s look at the different vehicle finance plans.

Hire Purchase or HP finance allows you to spread the cost when buying a car. It applies to new and used cars and rather than paying a single lump sum, it lets you pay a deposit followed by fixed monthly instalments. Once it’s paid in full, you can request that ownership be transferred to you.

Personal Contact Purchase or PCP is financing for used vehicles and spreads the costs over a longer repayment period. Your loan amount is based on value depreciation over the agreement term and not the total value of the vehicle.

Conditional Sale vehicle finance or CS financing spreads the repayment costs of a vehicle over a specified period. It’s similar to hire purchase agreements as you don’t own the car until it’s paid off. However, ownership transfers automatically to you once the loan is settled.

GAP insurance is beneficial in all three stated financing options as regular insurance doesn’t cover outstanding vehicle loan amounts. It’s also a handy safety net if your car finance has high-interest rates. GAP insurance pays the difference on the loan and settles the remaining debt.

Cars that depreciate quickly in value

GAP insurance benefits you further if your specific car’s value plummets faster compared to others. With this insurance, you ensure that you can financially afford the difference in depreciated and purchase value.

However, do your homework before signing up for GAP or normal insurance. Some insurance policies will replace your new car with another new one in case it’s scrapped or stolen.

Cars on lease

When obtaining a car on a lease, it’s worth your while to consider getting GAP insurance. Your regular insurance payout may not cover the entire value of depreciation and high-interest rates.

Without GAP cover, you’ll have to cover these costs or even carry on paying monthly instalments on a car you don’t have or drive. The right GAP insurance policy for leased cars will cover up to 100% of the remaining monthly rental payments.

What isn’t covered by gap insurance?

GAP insurance doesn’t cover all types of vehicle damage or loss. Your claim won’t be covered by GAP insurance if:

• Your vehicle is worth more than £75,000.
• Your vehicle is too old.
• Vehicles have more than 100,000 miles on the clock at the time of purchase.
• You use your vehicle for commercial purposes, such as taxi, hiring, or construction services.
• You want to modify your vehicle or after modifications cause loss.
• Your main insurer refuses a claim.
• Your vehicle is used for criminal activities.
• Your vehicle was damaged because you drove under the influence of alcohol or drugs.
• You do not have insurable risk on the vehicle.
• You missed payments on your policy or the policy expired.
• You’ve already submitted a claim.
• You’ve sold the vehicle.

How much does GAP insurance cost?

The price of GAP insurance is not fixed. Factors influencing the cost of GAP insurance (which can often be paid up front or in instalments) include:

• Make, model, and age of the vehicle
• The agreed excess amount
• Length of the GAP policy
• Type of GAP insurance you choose
• Age of the individual taking out the policy
• Where you get your GAP insurance. A dealership may charge 60% more than an online insurance company. It’s also wise to look at insurance comparison websites

How to make a GAP insurance claim

Just follow these steps when submitting a GAP insurance claim.

1. Call and report the incident to your GAP insurance company. You must do this before accepting any settlement from your normal insurer and within 120 days from the incident.
2. Complete the relevant claim forms and submit it along with any other required documents.
3. When everything’s in order, the GAP insurance company will pay the claim amount into your bank account.