GAP insurance explained: do you need it?
GAP insurance pays the difference in amount between an insurance payout and the outstanding finance - covering you in the event of a claim
No matter your car’s worth, the difference between what you paid for it and what your insurer will give you for it in the event of a claim can vary significantly. This difference in value is what’s referred to as the ‘gap’ in GAP insurance.
Such events can and do happen often, and this gap can potentially be thousands of pounds. This is largely due to cars losing so much money due to depreciation - especially when brand new. For most of a PCP finance contract, therefore, a car is worth less than the remaining amount owed, with the total amount you've paid for the car only catching up with the value it's lost in the final stages of the contract.
You may think that if the worst were to happen that you'd simply buy a car for the amount of money you got back from the insurer. If you're financing the car, though, the finance company will expect to be paid the full outstanding finance balance - which is likely to be more than the amount the insurer will pay out, leaving you out of pocket.
If you financed a typical £20,000 car and wrote it off after a year, you could easily end up owing the finance company over £1,000 more than the value of the car as determined by the insurer.
Of course, very few people have thousands of pounds burning a hole in their pocket, so it helps to be covered for this difference in amount. This is where Guaranteed Asset Protection (GAP) insurance comes in.
Although it seems like the perfect solution to a potentially massive problem, as with any insurance product, you must be sure to check the small print thoroughly and be certain that you do indeed want to take out GAP insurance and that your chosen policy is suitable for your needs.
Will my comprehensive motor insurance policy not cover the gap?
This goes to the heart of the problem. People think their comprehensive insurance policy will pay out whatever they paid for their car when they bought it, but it will typically only pay the car's market value at the time of the claim. If that's thousands less than the remaining finance balance on the car, you could find yourself having to top up the difference.
However, there are exceptions. Depending on your policy, cars up to two years old may indeed receive a payout sufficient to replace the car. Some insurance policies will simply replace a written-off car that's under a year old with a brand new one, too.
You'll also want to bear in mind any clauses concerning mileage and condition prior to your claim, as these may affect the value of the payout.
What types of car is GAP insurance available on?
Simply put, GAP insurance is available on most new and used cars. Both privately purchased and business-owned cars can be covered by GAP insurance. In most cases, the car must have comprehensive insurance on it.
GAP insurance is a safety net that only comes into action if the car is crashed or stolen, so you have to mull over how much that is worth to you and whether you'll be able to cover any shortfall between any insurance payout and the outstanding finance balance at the time.
Car finance GAP insurance: how does it work?
Say your new car cost £10,000 but was classed as a write off by your insurer after a crash 13 months later, GAP insurance could come into play. New cars lose value quickly, meaning that the car could be worth just £6,000 at the time of the crash.
In this case, £6,000 would be what the insurer would give you for the car but you might still owe around £9,000 to the finance company that lent you the money - despite the fact you paid a deposit and have made some monthly payments. The insurer’s £6,000 payout will go towards that figure but that would still leave you with £3,000 to find. Depending on the type of policy, GAP insurance would cover that shortfall.
The same goes if you bought the car outright with cash - either your own or borrowed from a bank or building society. To get back into a new car you’d still have to bridge the gap between the insurer’s payout and the cost of the new car. Again, depending on the type of cover purchased, GAP insurance could cover that shortfall.
What types of GAP insurance policies are there?
There are five main types of GAP insurance that cover different things. Make sure you know the differences before taking the plunge and purchasing one, as depending upon your situation, some may be more useful to you than others:
Finance GAP insurance
Finance GAP insurance pays out the difference between the car’s write-off value and what you owe the finance company, which is different from what you paid for the car. It’s the most common because most cars are now bought on finance.
✔ It gets the finance company off your back.
✘ It doesn't put you back in a new car - it just settles your finance debt. If you want to replace your car like for like, you’ll have to borrow money to replace what you’ve lost in depreciation and monthly payments.
Return-to-Invoice GAP insurance
Return-to-Invoice GAP insurance does exactly what it says on the tin. It goes one big step further than Finance GAP insurance by bridging the gap between the insurer’s payout and the cash price that was paid for the car. Cover is usually provided for three years.
✔ Not only does it settle your debt, it just about puts you back where you started.
✘ It's more expensive than Finance GAP and may not but quite sufficient to get you a car that’s exactly like-for-like.
Return to-Value GAP insurance
Return to Value GAP insurance pays the difference between the vehicle’s market value at the time of loss and the market value of your vehicle at the time you took out the policy (instead of the invoice price).
✔ It puts you in a better position to replace the car than if you just accepted the insurer’s payout based on the car’s current market value, and especially suits used cars.
✘ It still leaves you out of pocket.
Brand-New Car GAP insurance
Brand new car GAP insurance pays out not only what you paid for your new car but a little more in order to cover price rises, either through inflation or the withdrawal of deals that once existed but no longer do.
✔ It puts you back right where you started, no ifs or buts.
✘ It’s the most expensive and can be taken out on new or pre-registered cars only. Also, since the same benefit is offered on many comprehensive insurance policies, it’s probably unnecessary - at least for the first year or two, depending upon your standard car insurance policy.
Lease GAP insurance
Lease GAP insurance is available on any car that’s subject to a lease agreement such as Personal Contract Hire (PCH) - where you never become the owner of the car. Lease GAP insurance pays the difference between the market value at the time of loss and the balance outstanding to the lease company (the Early Termination charge). Cover is available for periods up to five years.
What won't GAP insurance cover?
- Extras, including most options, warranties, charges for excess mileage where the car is on a lease and any payment arrears.
- Compulsory and voluntary excesses over £250.
What questions should I ask when considering a GAP insurance policy?
You should read the small print thoroughly but the kind of questions you should ask in addition are:
- How long is the policy and when does it start?
- What is excluded from the cover?
- Have the GAP insurer and retailer adopted the ABI's voluntary good practice guide?
Is taking out GAP insurance a good idea?
Yes, GAP insurance is a good idea if:
• Your car is a type that loses value rapidly, resulting in a large potential gap between any insurer payout and the original cash price/remaining finance balance.
• You have a finance contract where you're paying a high level of interest that simply adds to your debt.
• You paid a small deposit when you got the car, meaning you have a bigger debt to settle.
• You have financed the car with PCP finance with a large optional final payment - also known as a balloon payment or guaranteed minimum future value (GMFV) - at the end of the contract.
No, GAP insurance is not a good idea if:
• Your car is less than two years, when your comprehensive insurance policy is likely to pay out the money required to put you back in a new car.
• You could pay the shortfall yourself in cash without paying the expensive premiums.