Gap insurance

Everything you need to know about gap insurance, explained

John Evans
Jul 31, 2019

‘Mind the gap’ is a regular announcement on the London Underground, but it’s also one to think about when financing a new or used car.

We’re talking about the difference - or gap - between what you paid for your car and what your insurer will give you for it should it be written off after an accident, a fire, or a theft.

Such events can and do happen, and the gap between the two figures can be thousands of pounds, mainly because cars lose so much money in depreciation - especially when new. 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, but if you're financing the car, the finance company will expect the full remaining balance on the finance back.

As a result, that could leave you seriously out of pocket, with you having to find the extra money to top up the insurer’s payout in order to replace your old car with a new one, as demanded by the finance company.

Fortunately, help is at hand in the form of something called Gap insurance or to be precise, Guaranteed Asset Protection insurance. We say ‘help’ but as with all insurance products, you should read the small print carefully to be certain the Gap insurance policy you’re buying is the right one for you. For more information, read the Association of British Insurers' guide to Gap insurance.

         

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 what they paid for their car when they bought it, but it will only pay its market value at the time of the claim. If that's thousands less than the remaining finance balance on the car, you could have to top up the difference yourself.

However, there are exceptions. Depending on the policy, cars up to two years old may indeed attract a payout sufficient to put you into a new replacement car. Some insurance policies will simply replaced a written off car that's under a year old with a brand new one, too.

However, check clauses concerning mileage and condition prior to your claim that may affect the value of the payout.

           

What types of car is Gap insurance available on?

Most cars – new and used, privately purchased or business-owned can be covered by GAP insurance. Usually, the car must have comprehensive insurance on it and GAP insurance only comes into action where a car is written off.

                 

How does Gap insurance 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 depreciate quickly meaning that at the time of the crash the car could be worth just £6,000.

In that 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 who lent you the money - despite the fact you paid a small deposit and have made some repayments. 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 be back in 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 purchase, Gap insurance should cover that shortfall.

                

What types of Gap insurance policy are there?

There are five main types:

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 bought on finance including around 90% of new cars.

Pros: It gets the finance company off your back.
Cons: 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 repayments.

Return-to-invoice Gap insurance does exactly that – 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.

Pros: Not only does it settle your debt, it just about puts you back where you started.
Cons: 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).

Pros: It puts you in a better position to replace the car than if you just accepted the insurer’s payout on based on the car’s current market value, and especially suits used cars.
Cons: It still leaves you out of pocket.

Brand-new car Gap insurance pays out not only what you paid for your new car but a little more besides to cover price rises, either through inflation or the withdrawal of deals that once existed but no longer do. It really is belt and braces.

Pros: It puts you back right where you started, no ifs or buts.
Cons: 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.

Lease Gap insurance is available on any car that’s subject to a lease agreement such as personal contract hire - or 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, if:
• Your car is a type that loses money rapidly, so quickly widening the gap between your insurer’s payout and what you paid for the car
• You’re paying a lot of interest that simply adds to your debt
• You paid a small deposit when you bought the car, meaning you have a bigger debt to settle
• You have financed the car on a personal contract purchase plan 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, if:
• Your car is no older 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 without paying the expensive premiums.

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