Understanding GAP insurance

Understanding GAP insurance

In honour of Insurance Awareness Day, we’re putting the focus of a lesser known area of motoring insurance – GAP insurance – to help you understand what it is and whether it’s worth buying.

When it comes to buying a car, there’s a lot of things to think about, and understanding everything can often be hard. One area of car buying that often causes confusion for drivers is GAP insurance. A survey carried out by Insure The Gap in 2017 found that only 28% of their 2000 respondents said they were familiar with GAP insurance. It’s hardly surprising, then, that only 1 in 10 of those surveyed said they would have it. But this lack of understanding and mistrust in signing up for another form of insurance leaves some car owners without some highly valuable protection. To help you make the right decision for your car purchase, we’re breaking down what GAP is, what are the different types and the limitations, and in which cases GAP insurance is worth it.

What is GAP insurance?

Guaranteed Asset Protection (GAP) insurance is designed to protect car buyers from losing money in the event of the total loss of their car.  When a car is written off by your insurer, it will only pay out on the value of the car at that moment. This is likely to be far less than you paid at the point of purchase due to depreciation. For new or higher value vehicles, this can equate to thousands of pounds lost.

So as an example, if you purchased a new car with an invoice value of £20,000. 2 years later, it gets written off and your insurance pays out on its current value of £12,000. This means that overall, you’ll have £8,000 less for your next car purchase. However, GAP insurance would cover the cost of that “gap” between invoice price and insurance payout.

What are the different types of GAP insurance?

While all types of GAP insurance do roughly the same thing, there are some slightly different versions of how the coverage works.

  1. Finance GAP insurance – If you’ve taken out some form of finance to fund your new car, this type of GAP insurance will pay out enough so that your debt can be paid off, but no more.
  2. Return-to-invoice insurance – As the name suggests, this form of coverage will pay you the difference between the invoice price of the car when you bought it, and the amount your insurer pays out.
  3. Brand new car (or ‘vehicle replacement’) GAP insurance – Similar to return-to-invoice, this type of GAP insurance covers the difference between the current and new car price of your car. However, unlike return-to-invoice, this is based on how much a replacement would cost now, as opposed to how much it cost when you bought it. This, therefore, takes into account how much car prices might have gone up in the meantime.

What are the exclusions or conditions?

As with all types of insurance, there are some exclusions to what GAP insurance will pay out on. It won’t cover and deductions made by your insurance company (e.g. unpaid premiums). It will cover your excess up to a point, but not necessarily the entire amount. Any limit to excess payment will be included in the policy documents. It will only cover factory-fitted or pre-purchase extras, so anything added after will not be covered. They can, however, be insured separately. GAP insurance will also not cover the cost of any other add-ons (like insurance, warranty or the GAP insurance itself).

It’s also important to make sure you understand the criteria for your GAP insurance to be valid and pay out. Most GAP insurance policies will only pay out if your car is insured fully-comprehensively. Your policy will also only pay out if the car is written off or deemed unrecoverable by your insurance company. And until your claim has been made successfully and settled, the policy won’t pay out.

Is it worth it?

With all this information, the only question left is, is GAP insurance worth it? Its main value is that it covers the difference that most buyers would not be able to afford to make up themselves. This is particularly useful if:

  • You’re buying a car that is likely to lose value quickly. This is more likely to happen on brand new, or newer used cars.
  • You’ve taken out some form of finance to fund your car purchase. This doesn’t just mean some form of car finance like PCP or HP, but also a personal loan which you’ve used to pay for the car outright. Either way, the GAP insurance will ensure that you have the money to pay back the full loan.
  • You wouldn’t be able to afford to replace your car like-for-like without it.

If you’re buying a new or used car and need more help understanding GAP insurance, our Client Advisors are happy to help. Our Mazda showrooms are in Weybridge, Bookham, and Orpington, and our Suzuki showroom is in Effingham.