When you make a claim insurers will only pay out what a car is worth now, not what it cost to buy, so the amount you get via your claim could be substantially less than you paid for it. GAP insurance therefore exists to cover the gap between the insurance pay-out and what you paid for your car, so you don’t end up out of pocket.
Don’t assume you won’t need this kind of cover – statistics show that nearly 120,000 cars are stolen every year, while more than 500,000 are written-off.
So, for example, if you pay £15,000 for a new motor, it will start losing value the moment you drive it off the forecourt. If you crash on your way home and write the car off, you might only get £12,000 from the insurer, which means you’d have to stump up at least another £3,000 of your own cash if you wanted to replace your car with a new equivalent model.
Why have GAP insurance?
The biggest downside of virtually all cars is that they depreciate in value incredibly quickly.
According to the AA, the average new car will only be worth around 40% of its original price after three years, based on the owner driving 10,000 miles a year. So if your car cost £20,000 new, it might only be worth £8,000 after three years.
Of course, the actual amount your car depreciates in value will depend on the make and model, but it’s safe to say that the vast majority of cars will lose a significant amount of their value over a few years.
This is where car GAP insurance can prove invaluable: it bridges the gap between the price you paid at the outset and the amount you receive from your insurer. By purchasing GAP insurance cover you protect yourself from having to make up the difference yourself should you want to buy an equivalent model to the one you bought a few years ago.
Types of GAP insurance
There are three types of GAP car insurance which cover cars to the value of £50,000. Your payment will be issued should your car be stolen or written-off after an accident.
1. Return to value cover
Return to value cover will pay the difference between your insurers ‘total loss payment’ and the value of your car when you took out your GAP insurance cover. A valuation will be made when you run a price comparison quote.
It is available for cars which have not been bought from a dealer within the last three months, are under seven years old and have less than 80,000 recorded miles on the clock. Cover is available for three years.
2. Return to invoice cover
Return to invoice cover pays the difference between your car insurer’s ‘total loss payment’ and the value of the car when you bought it.
To be eligible for cover, your car must have been bought from a dealer within three months of applying, be under seven years old and have less than 80,000 recorded miles on the clock. Cover is available for periods between 1-3 years.
3. Vehicle replacement cover
Vehicle replacement cover pays the difference between your insurers ‘total loss payment’ and the cost of a new car (same model, make, and specification).
It is available for cars which are less than three months old. Cover is available for periods between 1-3 years.
4. Finance cover
Finance cover pays the difference between your insurers ‘total loss payment’ and the outstanding amount you have if you paid for your car with a car finance loan.
Shopping around for GAP insurance
Car GAP insurance is a cost-effective way to protect your finances, and quotes start from just a few pounds per month.
In September 2015, the Financial Conduct Authority (FCA) enforced a number of rules ensuring that customers were not being misled into buying additional insurance add-ons while purchasing a car.
- Shop around for cover: The FCA is encouraging customers to weight up all their options rather than buying straight from the dealer. Car dealers now need to provide ‘prescribed information’ to help buyers make better informed decisions.
- Buying cover after a deferral period: GAP insurance cannot be purchased on the day the car is sold. Dealers will have to wait four days after the point of sale.
It doesn’t matter how you bought your car, whether you used cash or credit or whether you bought from a dealership or privately, you can still apply for cover.
Paying for GAP insurance
One advantage of buying car GAP insurance is that you can usually pay your premiums in monthly instalments, spreading the cost over up to 36 months, although this varies depending on the individual provider.
At the end of the 36 months, you can take out cover once again, provided your car does not exceed the seven-year age limit.
At this point, you will have to make a new application, and the car will need to be valued again, but once cover is in place you will have peace of mind that you are financially protected in the event that your car is stolen or written off.
To apply for a GAP insurance policy, you need to be at least 18 and the named driver of the car.