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Gap Insurance - what is it and do you need it?

Gap Insurance - what is it and do you need it?

It's common knowledge that brand new cars, once driven off the forecourt of a dealership usually depreciate rapidly. 

Most cars lose between 50% and 60% of their value in the first three years of ownership1.

Of course the amount a car depreciates depends on a number of factors including the make, type of car, mileage covered, its age and condition.

So what would your insurance company pay you, if your car is written off or stolen?

If your car is written off or if it's stolen - your insurance company would  only pay you the value of your car in that moment of time and not what you originally paid for it.  So it's very likely that it would be less than what you originally paid for it.

This is where GAP insurance is useful. GAP insurance (or Guaranteed Asset Protection) as it's formally known, covers the difference between the amount you paid for your car and the amount an insurance company would give you if it was stolen or written off.

Gap insurance is generally purchased for brand new vehicles, however they can also be purchased for relatively new second-hand cars and motorbikes.

Do you need gap insurance?

Now you may think that you don't need it, however getting gap insurance has its benefits.

Let's set the scene:

You buy a new car for £35,000 and 14 months later it's written off or stolen.  Your insurer pays you £26,000 - the market value of the car and not what you originally paid for it, leaving you £9,000 out of pocket.

Gap insurance can be beneficial in these areas:

1. Replacement of a brand new car
If you wanted to replace your car with a brand new model, you could consider gap insurance as it would pay you the difference of £9,000.  And dependent on the type of gap insurance you purchase you could get a similar brand new car, even if the price has gone up.

2. Paying off a loan
If you have taken out a loan or finance to pay for your car, without gap insurance, you could be paying off a loan for a car that you no longer possess or are unable to drive. 

There is also a risk of 'negative equity', where the level of debt is more than the value of the car.  So, in this case, it would be useful to have gap insurance to pay for any remaining finance and allowing you to pay back your loan earlier.

3. Ending your lease contract
If you have bought a car on lease, with an agreed mileage allowance, and your car is written off or stolen, you can be left without a car to drive.  But you may still have thousands of pounds to pay off your contract and no means to trade your car for a newer model.

Different types of gap insurance policies available:

  • Return to invoice
    This pays out the difference between the insurance payout and the original purchase invoice price or the outstanding amount owed to your car finance company - up to the claim limit you have chosen.
  • Vehicle replacement insurance (VRI)
    This covers the cost of replacing a brand new car, even if the price has increased.
  • Finance gap
    This covers you for the difference between your insurance payout and the outstanding amount you have left to pay on your finance. 

Do you qualify for GAP Insurance?

It certainly worth considering gap insurance, if your car ticks all of the criteria below:
  • Purchased the vehicle in the last 180 Days?
  • Was the car purchased from a VAT registered dealer?
  • Vehicle is less than 8 years old?
  • Vehicles has less than 80,000 miles on the odometer?
  • Vehicle is worth less than  £150,000?

If you're interested in discussing whether gap insurance is right for you, please complete the online form.

Legislation changes

The Financial Conduct Authority (FCA) brought in rules during September 2015, in the way in which gap insurance is sold. Car dealers are not allowed to sell it at the same time as they sell a new car.

There needs to be at least two days between selling a new car and selling gap insurance, allowing customers to shop around for a policy and price that suits them.

1. What Car? August 2016

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