What is GAP insurance?

Covering the shortfall.

Having the right coverage in place means answering all sorts of questions like, what is GAP insurance, and do you need it? Don’t worry. We’re here to help. Read on to find out all about this type of protection and why it may be a good idea for you to get a policy in place.

GAP stands for Guaranteed Asset Protection. While this kind of insurance can be secured for a range of important assets, it’s most typically used for vehicle coverage. It’s there to plug the gap between the amount your insurer pays out if something happens to your vehicle and the price you paid when you bought it.

So how does gap insurance work? We’ll take you through it.

How does GAP cover work?

Consider GAP cover insurance for your insurance. It protects you from a shortfall in the event that your provider doesn’t pay out the amount you paid on the original purchase price. 

You can buy this type of coverage from insurance providers and brokers, banks, finance companies, and car dealerships. 

What is car GAP insurance?

As we’ve discussed, you often hear about this type of protection in relation to vehicle coverage. So what is GAP insurance for cars — and why is it that cars need this added form of cover? 

The sad reality of buying a new car is that the value of it diminishes as soon as you drive it out of the lot. While there’s nothing like that new car smell, in financial terms, it unfortunately goes away pretty quickly. According to the AA, new cars will only be worth about 40% of their original value after three years on the road. 

That means that if your car gets stolen or written off, you’re likely to be out of pocket, meaning that replacing it with a new car of comparable quality may be out of reach.

GAP insurance for cars is there to help you out so that you don’t lose out financially if this happens.

GAP insurance can also be a good idea for leased vehicles. If something happens to your leased car, GAP insurance will assist you financially by paying the rest of what is owed on the lease, as well as any fees associated with ending your contract before its end date.

Does GAP insurance pay the full amount?

GAP insurance is there to take into account the rapid depreciation of cars — to essentially plug the gap between what you put into your car and what you get out should anything happen. So, no, it doesn’t pay the full amount.

You can either buy it as an add-on to an insurance policy you have taken out or get it through a separate insurer to top up your base cover.

What is an example of GAP insurance?

Say you buy a brand-new car for £20,000. A few months later, it’s written off. (Horrible thought, but important to consider.) Rather than paying you the full amount, your insurer offers you £16,000 as what is called a “total loss” payment. The car is no longer fresh out of the box, and its current insurance value reflects that. 

Enter GAP insurance. Because you thought ahead and took it out, you’re covered for the deficit. Your GAP insurance covers the missing £4,000, and you’re not out of pocket. 

While that may sound simple, different types of GAP insurance work in different ways (more on this below), so it’s important to get solid professional advice before you decide on the type of policy that may be best for your unique situation. 

If you’d like to chat with us, we’re here to help!

What does GAP insurance cover?

GAP insurance won’t pay the full value of an asset when it is stolen or damaged. Instead, it’s there to act as a supplement to the insurance you have. 

Generally, GAP insurance will only pay out if your car is considered a total write-off, either because it’s been stolen or severely damaged. 

It’s also important to note that GAP insurance typically won’t cover modifications to your car. (Also, any modifications that don’t comply with local law may void your insurance completely.) The best thing to do is keep your insurer abreast of any changes you make to your car so that you don’t have any nasty surprises down the line.

GAP insurance comes in all shapes and sizes. We’ll take you through the main types:

  1. Vehicle replacement GAP insurance

This type of GAP insurance helps you buy a new car by paying out the difference between your insurance payment and the cost of a replacement that matches the specifications of the original. Many insurers will offer this option for both brand-new and used cars. 

  1. Return to invoice GAP insurance

Return to invoice (RTI) GAP insurance takes into account how much you paid for your vehicle when you bought it (the invoice amount). It will pay the difference between what your standard insurance offers you and the amount you paid for your car. This kind of insurance is usually valid for approximately three years after you purchase your vehicle.

  1. Return to value GAP insurance

This type of insurance is similar to RTI, except that rather than paying the difference between the current market value and the invoice amount (i.e. the amount you paid for your vehicle), it will pay the difference between the market value at the time you purchased your vehicle and the market value at the time of loss. 

This may be a better bet if you’ve bought a second-hand vehicle or have purchased your vehicle through a private seller. That’s because the market value at the time of purchase is likely to be higher than your purchase price.

  1. Finance GAP insurance

If you bought your vehicle under a finance agreement, this type of GAP insurance will pay the difference between the market value of your vehicle when it was written off or stolen and the amount you still have to pay to your financier.

Often, this payment is made directly from your insurance provider to the company you have a finance agreement with.

  1. GAP insurance for a leased vehicle

GAP insurance can be a wise idea if your vehicle is under a hiring or leasing agreement where you aren’t working towards ownership of it. GAP insurance will pay the difference between the market value of your vehicle at the time of loss and how much you still owe to the lease company according to your lease deal. It may also cover any fees associated with ending your leasing agreement early.

How long does GAP insurance last? 

That all depends on the type of GAP insurance you choose — but the important thing to know is that it’s usually for a shorter amount of time than other kinds of car insurance. 

The standard length of coverage is about three years. 

Note that, according to the Financial Conduct Authority, you can’t buy GAP insurance from a dealership on the same day you buy your vehicle. You have to wait for two days to pass. 

To determine whether GAP insurance is a good idea, it’s essential to first evaluate what your current insurance offers. In some cases, it may be sufficient to cover you should anything happen to your vehicle. 

There are situations where GAP insurance is worth considering, including if you are buying a brand-new car, financing your vehicle, or driving under a leasing agreement.

The reality is there’s no one-size-fits-all when it comes to insurance, so the best thing to do is chat with a respected insurance provider to see the best options for your unique situation. 

Quickfire summary

GAP insurance covers the financial shortfall that you could experience if your vehicle is stolen or written off. Because the value of new cars depreciates quickly, what you buy your car for and what it’s worth a few months or years later can be in stark contrast.

In some cases, GAP insurance may be included as an add-on to your car insurance policy; in others, you may have to purchase it from another insurer.

Your vehicle will have to be declared a “total loss” by your insurer for it to be eligible for a GAP insurance payout.

There are different types of GAP insurance policies, including:

  • Vehicle replacement GAP insurance, which will help you buy a new vehicle of the same specifications as the one that has been stolen or damaged.
  • Return to invoice GAP insurance, which will plug the gap between the current market value of your vehicle and what you initially paid for it.
  • Return to value GAP insurance, which will cover the difference between the market value of your car at the time of purchase and the market value of your car at the time of loss.
  • Finance GAP insurance will help you meet your financial obligations to a finance company.
  • Lease GAP insurance, which will pay the difference between the market value of your car at the time of loss and how much you owe the leasing company.

Speak to us to see if you can save money on your car insurance. Get a quote with us today to set up your car insurance.

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