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Everything you need to know about GAP insurance

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What is GAP Insurance?

GAP – or Guaranteed Asset Protection – insurance is a special type of policy that covers you financially for the difference between what an insurer will pay out if your car gets written off or stolen and what you paid for it.

GAP insurance exists because insurers only pay out the current ‘market value’ of an insured vehicle in the event of a ‘total loss’ – and this is usually substantially lower than the price at which it was purchased.

For example: If you buy a car for £20,000 brand new and 6 months later the car is declared a write off, the insurer may only pay-out £15,000 market value as new cars depreciate very quickly. This leaves you £5,000 down on your initial purchase – and with no car to show for it. GAP insurance will cover the shortfall, thus giving you enough money to buy another new car.

What are the different types of GAP insurance?

The types of GAP insurance available on the UK market can seem confusing at first, but they are actually relatively simple to understand:

Vehicle Replacement Insurance (VRI)

If you bought your car from a dealer in the last few days and it has covered very few miles (usually less than 500), then this will usually be offered. The policy will be enough to cover the cost of a brand-new replacement to the same specification. The subtle advantage with this policy is that, if car prices have increased since you took out cover, then this inflation will also be reimbursed, allowing you to get back into an identical car to the one originally purchased – or as near to it as possible.

Return to Invoice (RTI)

This popular choice of GAP cover applies to cars purchased from a dealer in the past few months. In the event of a write-off it will make up the difference between the insurer’s pay-out and the invoiced price of the car when you bought it. It should also cover any outstanding finance or lease charges but be sure to check.

Return to Value (RTV)

This is for cars purchased privately, with no invoice, or older cars that have been owned for a while. There will be age and mileage limits – usually around 70,000 miles and 7 years of age. In the event of a write-off, you will be reimbursed for the value of the car on the day you took out the cover. This value will be independently verified by Glass’s Guide or similar industry journals.

What do I need to consider before purchasing GAP insurance?

There are a few things to watch out for when searching for cover.

  • If your car is leased or financed in some way, make sure outstanding charges are covered by the GAP policy - whosever name the car is registered in or owned by.
  • Providers will often allow you to vary the maximum sum covered in the event of a claim. This keeps premiums down but might make the cover insufficient. Look to cover 50% of the cars value on the day you take out the policy.
  • Always ensure the provider is authorised and regulated by the Financial Conduct Authority (FCA).
  • Make sure you are aware of any car insurance excess that will be covered.
  • Since new cars depreciate much quicker than used cars, buying GAP insurance for a new car is generally much better value.
  • Always check with your insurer first. If you have a brand new car many insurers will replace the new car in the first 12 months reducing the need for a GAP policy until after 12 months.

Are there any exclusions I need to be aware of?

Cover details will differ between policies and providers so make sure you are aware of exactly what is covered. Some common exclusions that you should check for are:

  • Insurer will only pay out if your car is stolen or they judge that it’s a complete ‘write-off’
  • Insurer will only pay out if you have fully comprehensive car insurance
  • Extras added to the car will not be covered. So, if you add alloys or spoilers after purchasing the car these will not be paid for in the ‘difference’ between the market price and what was originally paid.

What are the main reasons to buy GAP insurance?

When you think about it, GAP insurance is essentially an insurance policy that covers the shortcomings of your existing insurance policy. It’s insurance insurance. Though this may seem ridiculous at first glance, there are three main reasons that it may be a prudent purchase for some:

Car value depreciation

It’s common knowledge the value of a car depreciates disturbingly fast – and the newer it is, the quicker it loses value. According to the AA, brand new cars lose value as soon as you drive them off the forecourt and will lose around 40% of the price you paid for it by the end of the first year. Assuming you do 10,000 miles a year, your average car will have lost 60% of its initial value by the end of the third year.

The rate of depreciation will vary from car to car and generally slows significantly depending on the age of the vehicle.

Therefore, if you want to mitigate against this depreciation, should you be unfortunate to have your new car written-off or stolen, a GAP insurance policy can make sense.

What was the fastest depreciating car of 2018?

According to What Car?, the winner of this ignominious prize goes to the Renault Zoe I-Dynamique Nav Quick Charge, which loses a staggering 75% of it’s value in the first year. Apparently, depreciation is a big problem with electric cars that is ostensibly due to the short lifespan of their batteries and the cost of their replacement.

Here’s a rundown of the Renault’s plummeting value:

  • List price: £29,020
  • Value after year 1: £7,250 (25.0%)
  • Value after year 2: £6,175 (21.3%)
  • Value after year 3: £5,100 (17.6%)

Car finance popularity

Another reason to justify the purchase of GAP insurance is if you bought your car under a finance scheme which has become an increasingly common trend for UK motorists over the last few years.

If your car is written off before you have finished your finance term, the pay-out on your standard insurance policy will be less than the amount you borrowed (as well as the interest). So you will be stuck paying back the finance, without having the car which it was taken out on.

In this situation, GAP insurance would be a suitable solution to cover the shortfall and it should also cover any finance charges – but check the policy.

The increasing complexity of vehicle technology has seen an increase in the number of cars designated as write-offs. A 2017 study by Churchill Insurance found 400,000 vehicles were written-off each year – that’s about one every 90 seconds on average.

Motorists buying top range vehicles with expensive parts and complex systems that are not economical to fix or replace may therefore want to consider GAP insurance as they may be more likely to be assessed as damaged beyond repair.

When GAP insurance might be a good idea:

  • You have bought a car that depreciates rapidly
  • You have bought a car on finance
  • You would want to replace your car with a brand new one in should it be written off

When GAP insurance might be a bad idea:

  • You are happy to replace your car with a similar used car rather than a new car if it is written off
  • You have bought an older car or a car that is subject to minimal depreciation
  • Your brand new car is covered for a new replacement under your existing car insurance policy
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