What is gap insurance, and how does it work?
The moment you buy a new car and drive it away, it starts to depreciate in value – the AA says that the average car is only worth 40 per cent of its original value after three years. So, in practice, if a car cost you £15,000, then it might only be worth around £6,000 three years later.
Should the car then be stolen or written off, your insurance company will only pay out for the value of the car at the time – in that case, £6,000 – meaning that if you want to fund a direct replacement for the car you no longer have, you’ll have to find the same amount again from your own funds.
Guaranteed Asset Protection (GAP) cover can complement your existing car insurance and cover you when your car has been stolen or written off, but its value has gone down to the point where any insurance payout received wouldn’t cover a replacement, or the cost of the remaining contract hire.
- Reader service: cover the difference between your motor insurance payment and the FULL value of your car with The Telegraph Gap Insurance
What are the benefits of gap insurance?
The term ‘GAP’ is the key – it ‘bridges’ the gap between the current market value of the car and the remaining amount that has yet to be settled, topping up the payout from the insurer and giving you the extra funds to buy a replacement car or settle any outstanding finance on what you still owe from when you bought it.
So, as well as getting the £6,000 from your car insurer, gap insurance would pay out the remaining £9,000 so that you could replace your vehicle with one similar to the model you originally purchased.
Is it worth it? Do I need gap insurance?
When gap insurance may be right for you:
- If the new car you bought is one that depreciates in value very quickly.
- If you’ve borrowed significant finance to buy the car, and would end up owing more (in capital and interest) than the car’s market value because of a lower insurance payout.
- If you’re leasing the car on a contract-hire basis, and could end up owing more than the car’s market value the insurers are happy to pay out.
- If you want to ensure that you are able to fund a replacement model at the same value.
When gap insurance may not be the answer:
- If you have a fully comprehensive insurance policy, you might be entitled to a like-for-like brand new car as a replacement within the first 12 months of ownership (of a new car), though it will depend on the exact policy you have.
- If your car finance agreement – be it with the dealer, a bank or a loan company – covers the ‘gap’ already.
- If your car is not a brand new model – even if only a couple of years old – it will have a much lower rate of depreciation, having gone down already, so it may be less of an obvious option for gap insurance. Ditto cars that cost so little that they wouldn’t depreciate by much.
There are often exclusions with gap insurance, including but not restricted to:
- If the car is badly damaged but not written off.
- If you are not covered by fully comprehensive insurance.
- If your claim has yet to be settled in your favour.
Whatever car you drive and however careful a driver you might be, don’t assume that a write-off won’t happen to you. According to the RAC, more than 500,000 vehicles are written off each year, and numerous ‘total loss claims’ are caused by the action of third parties, so it pays to be protected against the risk of financial loss.
Cover the difference between your motor insurance payment and the FULL value of your car with Telegraph Gap Insurance