GUIDE TO GAP INSURANCE
WHAT IS GAP INSURANCE
GAP (or “Guaranteed Asset Protection”) insurance is sometimes called Car Depreciation insurance and this latter term is perhaps a better descriptor of this kind of insurance product. It acts as a “top up” policy that is triggered in the event of a “total loss” settlement being made on your comprehensive motor insurance policy. A “total loss” settlement usually occurs if a car is written off in an accident or stolen and not recovered. In the UK about 200,000 cars are stolen and 500,000 cars written off each year.
GAP insurance pays out in the event of such a settlement being made and the amount paid is the difference between the insurer’s payment to you and the value of the car when the GAP policy was bought. There are three main types of GAP insurance policy that cover different car purchase circumstances and these are outlined below.
HOW DOES IT WORK?
Imagine that your car is stolen or written off in an accident. Many motorists believe that their motor insurance policy will pay for a replacement vehicle. However, not all drivers are aware that insurers will base their payment on the value of the car at the time of the incident rather than on the price that was paid for the car when it was bought.
Now imagine that the car was bought using a loan or finance scheme. You may find that the amount received from your insurance company does not cover the sum still owed on the vehicle.
For example, you paid £20,000 for your car and took out a £17,000 loan to pay for it. Your car is stolen and your insurer has paid out £11,000 to cover the value of the car at this time. However, you still owe the finance company £15,000 and under normal circumstances you are liable for the full repayment of this debt. Without GAP insurance you would have to find another £4,000 in order to pay this off. With it, this amount (possibly more depending on the type of GAP insurance held) will be funded by your GAP insurance policy.
WHO CAN BUY IT?
There may be some variances between the policy provisions of different GAP insurance companies and purchasers will need to be aware of this.
Firstly, the purchaser of the GAP insurance policy must be the registered owner or keeper of the car to be insured.
Secondly, there are provisions with regards to the car itself. Cars need to be under 7 years old and have less than 80,000 miles on the clock when the GAP cover is bought. It also needs to have a value of less than £50,000.
When applying for GAP insurance cover you will be asked when your car was purchased as the recency of this will affect the type and level of cover that can be bought.
Finally, GAP insurance needs to be bought alongside a fully comprehensive car insurance policy rather than with third party or third party, fire and theft cover.
WHAT DIFFERENT TYPES OF GAP INSURANCE ARE AVAILABLE?
There are three different types of GAP insurance policy available, each designed to meet different needs and vehicle criteria. Again these example criteria are taken from the Warranty Direct products:
RETURN TO VALUE (RTV) GAP INSURANCE
For cars under 7 years old, with less than 80,000 miles on the clock that have NOT been bought from a dealer within the last three months. RTV GAP insurance pays the difference between the insurer’s payout and the value of the car when the GAP insurance policy was bought.
RETURN TO INVOICE (RTI) GAP INSURANCE
For cars under 7 years old, with less than 80,000 miles on the clock that have been bought from a dealer within the last three months. This pays the difference between the insurer’s payout and the original invoice price paid for the car.
VEHICLE REPLACEMENT (VR) GAP INSURANCE
For new cars – under 3 months old and with less than 500 miles on the clock. This pays the difference between the insurer’s payout and the cost of buying a brand new car of the same make, model and specification.
WHY SHOULD CAR OWNERS CONSIDER IT?
With around 700,000 “total loss” settlements made each year by insurers, there is always a risk that your car might be stolen or written off. If this is the case then you should understand that any payout received from your insurer will be based on the value of the car at the time of the theft or accident, rather than what was paid for it. This is acceptable to many drivers but any car owners that used a loan or other financing scheme to purchase their vehicle could find themselves seriously out of pocket if the sum still owed to the finance company is greater than the payout made by the insurer.
Any driver with outstanding finance on their car should consider GAP insurance as a way to manage this outstanding payment and to protect themselves from what could be a significant financial loss. GAP insurance can be bought at any time as long as the car meets the insurer’s eligibility requirements and does not have to be bought at the same time as the car is purchased.
HOW TO BUY GAP INSURANCE
GAP insurance is often sold by car dealers when cars are purchased, especially when the car is purchased using a finance programme. However, these dealers often receive big commissions from GAP insurance providers and this in turn increases the cost of the policy. In the same way that it pays to compare car insurance prices and policies by shopping around, the same is true of GAP insurance.