Having the right cover in place is vital when it comes to protecting your most precious assets. So is GAP insurance worth it, and is it the right option for you? We’ll take you through the details below.
The possibility that something might happen to your new car is one of the last things you want to think about. The right insurance helps stave off the stress of unfortunate events like accidents and theft by taking the un out of the unforeseen.
But while you may think your insurance covers you for what you paid when you purchased your car, this may not always be the case.
Brand-new cars generally lose about 20% of their value after just one year. That depreciation means you may get out far less than you put in when you bought your vehicle. That’s where GAP insurance comes into play. It helps protect you from the loss you may incur if your car loses its value between the time of purchase and when you have to make a claim.
Read on to find out how GAP insurance works and why you might need it.
What is GAP insurance?
In insurance terms, GAP stands for Guaranteed Asset Protection. The acronym is apt — this type of insurance is specifically designed to cover the gap between the total value of a new vehicle and the payment you would receive from your insurer should something happen to it.
Do I need GAP insurance?
GAP insurance is particularly important if you buy a new car. Because of the rapid depreciation of new vehicles, you can easily find yourself in a situation where you lose a substantial amount of money if something happens to your car, even if you have insurance in place.
Say you buy a car for £14,000, and it gets stolen a year later.
When deciding how much to pay you out, your insurer will look at your car’s current value rather than what you paid for it originally.
If its value has depreciated by 20% that year, it will now be worth £2,800 less than you paid for it — a new value of £11,200.
If you don’t have GAP insurance, this £11,200 is what the insurer will pay out, not the £14,000 you initially put into the purchase.
The situation may be even worse if you are financing your car. In this case, you may land up in debt for the difference between the current and original value plus any interest you incur.
Being kitted out with GAP insurance makes purchasing a new vehicle far less risky. In the best-case scenario, you can replace a damaged or stolen car with the same make or model as the original. But even if this isn’t possible, you won’t be left in debt trying to pay off the original purchase amount to a lender.
Does GAP insurance pay full amount?
GAP insurance won’t pay the full value of your car. Rather, it will plug the gap between what your insurance pays out and what you originally paid for your vehicle.
This means you still need regular vehicle insurance even if you opt for GAP insurance. Consider it a top-up.
If you’re looking for a plan that will cover you for the value of your vehicle if it is written off or stolen, as well as any difference between that amount and the purchase price, Howden offers Total Loss Plus insurance. This plan is specifically designed to help you replace your car if it is damaged beyond repair, giving you up to an additional 25% of the market value.
What are the different types of GAP insurance?
There are a number of different types of GAP insurance, each catering to a different set of needs.
Your insurer may offer you:
- Finance GAP insurance. If a financed car is stolen or written off, a standard insurance plan will typically pay out the market value of the car. This amount may not cover what you owe on your vehicle. Unfortunately, you will still be liable to pay what you owe to the lender. Finance GAP insurance is there to eliminate this burden by paying off what you owe.
- Lease/contract GAP insurance. This insurance works similarly to finance GAP insurance in that it will cover any shortfall between what the car was originally worth and the current market value. Many of these policy types have other benefits, too. They may, for example, cover any leasing fees you still owe.
- Return to Invoice (RTI) GAP insurance. RTI insurance will help you cover the difference between the insurance settlement and the original value of your car at the time of purchase.
- Total Loss Plus insurance. As mentioned above, our Total Loss Plus insurance plan covers the market value of your vehicle plus an additional 25% so that you can get a comparable replacement. Head here for a quote.
Is GAP insurance worth it on a cash purchase?
GAP insurance might be worth it on a cash purchase as it could help you make up the difference between the settlement your insurer offers you and the amount you originally paid for your car.
That being said, there are different kinds of GAP insurance, and not all are appropriate for a cash purchase.
Finance or lease GAP insurance, for example, pays off the amount you owe a lender, rather than replacing a vehicle. This means that they’re not especially useful in the event of a cash purchase.
RTI insurance, on the other hand, would be beneficial as it will help you recoup any money you lose on the depreciation of a new vehicle.
It’s important to consider whether GAP insurance is the right option for you personally. We can help you do that by finding the plan that fits your exact set of circumstances and needs. Find out more here.
Is GAP insurance worth it on a used car?
GAP insurance is typically more geared towards covering new cars because of their rapid depreciation after purchase. There are situations, however, where GAP insurance may be worth it for a used car.
Standard auto insurance will typically pay out the market value of your car if it is badly damaged or stolen. For a car that was new at the time of purchase, this will certainly be less than what you paid for it. Used cars also lose their value, though, leaving a gap between what you paid initially and what your insurer pays out. That’s where GAP insurance comes into play.
GAP insurance may be right for a used car if you don’t want to dip into your savings to get an identical replacement. However, because used cars lose their value at a much slower rate, the benefits of this type of additional coverage are not necessarily felt as acutely. It’s also important to note that many insurers won’t provide GAP insurance for vehicles that are about seven years or older.
Does GAP insurance cover personal loans?
Cars are generally financed in two ways — either through a personal loan from your bank or through dealer financing.
GAP insurance can be used for personal loans. The type of insurance you would get for this purpose is likely to be RTI GAP insurance or Total Loss Plus insurance. These will both help you recover any shortfall that you may have after losing your car.
If you have purchased your car through dealer financing, you don’t technically own your car until you have paid the amount in full. GAP insurance can help here, too, as it ensures that you aren’t indebted to the dealer if something happens to your car. Finance, lease or contract GAP insurance would be appropriate in this case.
To sum up…
GAP insurance can be a lifesaver if your vehicle is stolen or written off. Because new cars depreciate in value very quickly, the difference between an insurance settlement and the value of your car at the time of purchase can be substantial.
GAP insurance is intended to bolster your primary motor insurance by making up for this disparity. The right kind of coverage will allow you to buy another car of a similar make and model and/or pay off any debts to a car dealership or financial institution.