Gap insurance, also known as Guaranteed Asset Protection, has the aim of providing some peace of mind and financial protection if something happens to your vehicle. Cars and other vehicles generally lose value over time as you drive them and add more miles. If your vehicle is stolen or you suffer an accident, a common scenario is that the insurance company declares the vehicle beyond repairs and writes it off. However, they will only ever pay the market value of the vehicle at the time of the loss. This might not be enough to give you back what you paid for the car, or to settle the outstanding finance on your vehicle. Gap insurance is there to make up the difference.
Every Gap insurance policy will have terms and conditions which you must agree to. These vary but usually include:
Usually, you have a limited time period after buying the vehicle to arrange GAP insurance and this can vary from 30 to 180 days. Most GAP insurance policies will run for anything between two and five years. The policy will start from the day you bought the vehicle rather than the day you took the policy, so it’s always best to arrange this as soon as possible. If you wait the six months maximum to take out a three year policy, in effect you are only getting two and a half years of cover, not three.
There are many different Gap insurance products on the market, and the policy you choose will depend on your circumstances. It is always wise to look around at your options before buying any insurance policy, and Gap insurance is no different in this respect. The main types of Gap Insurance are:
Leasing or hiring a vehicle is an increasingly popular choice, but requires a different type of insurance as this form of finance means you will never own the vehicle. The insurance will cover any shortfall which you might owe the leasing or finance company after the insurer has paid out, if the vehicle is badly damaged or stolen.
Many policies also offer the option of deposit protection insurance, which covers the initial down payment which you make on a new lease agreement. Claiming this back in the event of a total loss gives you enough cash to put down a deposit on your next lease without delay and will mean you don’t have to be without a car while you save up for another deposit.
Each policy will have different features and benefits, but there are some common aspects to most cover. Before signing up for a policy, take some time to look at all of the offers on the market and carefully compare the features and benefits which the policies offer. The most common features you can expect to find on a Gap insurance policy are:
Not all car insurance policies give “new for old” cover, and often only cover new cars for one or two years. That should mean that if your car is written off, the insurance company will get an identical one for you, right? Well, not always. There will usually be lots of terms and conditions stating the circumstances in which new for old will and will not pay out. Insurers often will not pay out if they cannot source a replacement vehicle in a given time, or you are not the registered keeper because you are leasing.
This could mean that you are only awarded the market value of the car at the time of the write-off, which might not be enough to get a replacement.
A lot of the reasons why Gap Insurance is a good idea for new vehicles equally apply to used cars. All cars lose value, although used cars tend to lose value less quickly than brand new. The cost of repairing used cars is rising, partly due to the fact that used cars have increasing levels of gadgets and extras such as sensors or cameras, and partly because of a shortage of mechanics leading to rising costs for labour. This all means that the level of damage which results in a car being written-off is less than ever, as repairs cost so much to complete.
Many motor dealers will have their own GAP insurance policies and these will be offered to you as an add-on when taking finance or negotiating the price of the purchase through the dealer. Buying insurance through the dealer can be an expensive decision though. Research has shown that the typical price for Gap insurance sold by a dealer is around £300 to £400, but if you purchase it independently, the cost can be half that amount. Always shop around to make sure you are getting the best value for money in terms of not just cost, but also in the features offered.
Dealers are more expensive partly because they are only selling a small number of policies, and often offer through intermediaries who take a cut too. They will also usually offer commission to salespeople for selling insurance. Higher rates of tax may also apply to insurance policies sold through a dealer. Dealers may also only be able to offer their specific Gap insurance policy, whether or not this is the most appropriate policy for your needs.
There have also been accusations in the past that car dealers can be very pushy when offering Gap insurance, leaving customers feeling pressured into taking it. Legislation came into effect in 2015 from the Financial Conduct Authority which is supposed to put an end to these tactics, and this bans dealers from pushing you to take insurance at the same time as buying the car. They must now give you the information and allow you two days to look elsewhere for similar products.
You might think that the obvious place to look for Gap Insurance is with the same company which provides your standard motor insurance policy. Very few insurers do offer gap insurance though, although some are starting to dip their toes into the market. Most of the large online comparison sites will let you compare costs for Gap insurance in the same way as comparing the costs for other insurance products.
Often, brokers are the best place to get advice on Gap insurance. Specialist firms have been in the market for years, and can give expert advice. Prices are often lower through a broker, and they will be able to offer a wide range of products through a panel of different insurers. A broker which does nothing but sell Gap insurance will have come across your particular situation before, and will be able to give specific advice and recommendations better than an insurer which offers a much wider range of products.
Many dealers do not have their own insurance company offering cover but deal with an approved finance house which sells products on their behalf. They may offer you a call from an expert to talk through your options. The main issue with this approach is the range of options, as obviously any finance company will only be able to offer their own products.
Although price is often the starting point for any purchase of Gap insurance, it shouldn’t be the only factor which you consider. The general rule is that very cheap policies do not offer the level of cover of the more expensive ones, but it is essential to always look at what you are being offered and compare products from different companies before making a final choice. This applies whichever route you are using to purchase a gap insurance policy. Never make a decision on the spur of the moment, or feel pressured into taking a policy you are not sure about from a pushy salesman in a car showroom.
Most Gap insurance policies are sold through a retailer, whether that is your car dealer or insurance broker. The company which underwrites the risk of the insurance is usually a different company altogether. If the retailer closes or goes out of business then your insurance policy will remain in place. If you need to make a claim, then you will deal directly with the insurance company and the retailer or dealer will have little to do with the process. If the insurance company themselves goes bust or out of business then the Financial Services Compensation Scheme will pay up to 90% of the claim if you need to submit one.