Do you need GAP insurance?

Guaranteed Asset Protection or GAP insurance is a financial product often sold when you buy a brand new car. In the event your car is stolen or written off (total loss), GAP insurance covers the difference between the current value of the car (the amount your car insurer will usually pay out) and the amount you paid for the car in the first place, or any outstanding payments. So is it worth buying?

• What is GAP insurance?
• Is GAP insurance worth it?
• Types of GAP insurance
• Watch the exclusions
• How much is GAP insurance and where to get it
• Your next step

What is GAP insurance?

Even if your car insurance is fully comprehensive, you can still lose money if your brand new car is written off (total loss).

This is because depreciation means brand new cars lose their value very fast.

On average, a brand new car loses 60% after three years (Source: The AA).

For example, if your brand new car cost £12,000 and it was stolen or written off three years later, you only get its current value, £4,800, from your insurance company.

This isn’t enough to buy an equivalent brand new car and unlikely to be enough to repay what you owe on your finance deal.

GAP insurance is designed to cover the difference between what your insurer pays out and, depending on the type of policy:

• What you paid for the car
• What you still owe on the car

GAP insurance is not typically designed to cover older or relatively inexpensive vehicles.

This is because their rate of depreciation is relatively low.

Is GAP insurance worth it?

GAP insurance could be useful to have if…

You risk being in negative equity, because you owe more than the car is worth.

You might end up owing more than the value of your car if:

• you’re paying a lot of interest
• the kind of car you bought loses value quickly
• the down payment for your finance deal was small (say 20%)
• you’re paying the debt off slowly (over three to five years, for example)
• the structure of your finance arrangement means you’re due to be left with a big lump sum to pay at the end – known as a ‘balloon payment’.

You’re on a contract hire deal

If you’ve signed up for a long-term contract hire arrangement and the car you’re renting is written off (total loss) or stolen, you might end up owing the contract hire company more than your insurance company is willing to pay out.

You wouldn’t be able to afford to replace your car

You’re concerned, because of your brand new car depreciating in value, you wouldn’t be able to afford to replace it on a new-for-old basis.

GAP insurance is probably not suitable if…

Your car is less than 12 months old and you’re the first registered owner

Most fully comprehensive car insurance policies offer brand new car replacement during the first 12 months of ownership.

However, be careful to read the terms and conditions of your policy for any restrictions or exclusions.

Some policies will not offer new-for-old where the car:

• has been stolen, or
• is subject to an accident where the insured is at fault.

You’re already covered by your finance agreement

If you’re using a finance agreement that already covers you for the difference between the ‘book price’ (official value of the car) and how much you paid, you don’t need to add GAP insurance.

You could afford to make up for any shortfall

Paying for an insurance policy like this is probably not worthwhile if you can afford to cover the difference between the current value of the car and its original value or what is left to pay on finance.

Types of GAP insurance

There are three main types:

• Finance GAP insurance: If you’ve borrowed money to buy the car, you might still owe more than the insurance company will pay out. Finance GAP insurance pays the finance company enough to cover your debt, but remember you’ll be left with no car and no money.
• Return-to-invoice insurance: This is designed to top up the payment from your car insurance so you get back exactly what you paid for the car (or any outstanding finance). This type of policy can be bought for both new and second hand cars.
• Brand new car (or ‘vehicle replacement’) GAP insurance: This is like return-to-invoice insurance, but it’s designed to compensate for the rising cost of cars, or where a discount has been given on the cost of the car which might not be available again in the future. Brand new car GAP insurance makes sure you get your money back plus a bit more, so you can replace your car for a new one of the same model and specification.

Of the three options, brand new car GAP insurance gets you the biggest payout, but you’ll probably find it’s the most expensive.

Watch the exclusions

GAP insurance might not cover you for as much as you’re expecting:

• It won’t cover any amount deducted by your main car insurance company. For example, if they reduce your payout because of unpaid premiums, salvage value or contributory negligence, these won’t be covered.
• GAP insurance will generally only cover excesses up to £250 of your claim. Higher or voluntary excesses above this amount won’t be covered. However, you can choose to purchase an additional insurance to cover this.
• It won’t cover any non-standard extras that you added to the car after you bought it, for example speakers and satnav.
• Nor will it cover warranty charges, insurance (premiums including GAP insurance), road fund licence and any other warranty or add-on in most cases.
• It might not cover anything you think your car insurance owes you. If your main car insurance company offers you less than the market value of the car, and you accept, the GAP insurer won’t make up the difference.

On top, you only get the money if:

• your insurance is fully comprehensive
• your car has been labelled a total write-off or unrecoverable
• you’ve made a successful claim and everything is settled (until then, you’ll have to manage your finance payments on your own).

How much is GAP insurance and where to get it

Shop around. You don’t have to take out GAP insurance as part of your car finance deal – in fact it’s often cheaper to buy it elsewhere.

Your next step

This article is provided by the Money Advice Service.