Do you need GAP insurance?
Guaranteed Asset Protection (GAP) insurance is a type of insurance that is often sold when you buy a new car. In the event your car is stolen or written off, it covers the difference between the value of the car (this is the amount your car insurer will usually pay out) and the amount you paid for the car in the first place. So is it worth buying? Read on to find out.
- What is GAP insurance?
- Do you need GAP insurance?
- Types of GAP insurance
- Watch the exclusions
- Where to get GAP insurance and what it costs
What is GAP insurance?
GAP insurance claims ratios are exceptionally low at 10%, so it’s particularly important with this type of insurance to shop around.
Source: The FCA
Even if your car insurance is fully comprehensive, you can still lose money if your new car is written off. This is because depreciation means new cars lose their value very fast. On average, a new car loses 60% after three years (Source: The AA).
For example, let’s say your car cost £12,000. If you wrote it off after three years, you’d only get its current value, £4,800, from your insurance company. That’s not enough to buy an equivalent new car, and unlikely to be enough to repay what you owe on your finance deal.
GAP insurance is designed to cover the difference between what your insurer pays out and, depending on the type of policy:
- what you paid for the car
- what you still owe on the car
- what it would cost you to buy the car now
Do you need GAP insurance?
GAP insurance could be useful to have if…
You risk being in negative equity, because you owe more than the car is worth
You might end up owing more than the value of your car if:
- the down payment for your finance deal was small (say 20%)
- the kind of car you bought loses value quickly
- you’re paying a lot of interest
- you’re paying the debt off slowly (over three to five years, for example), or
- the structure of your finance arrangement means that you are due to be left with a big lump sum to pay at the end – known as a ‘balloon payment’
You’re on a contract hire deal
If you’ve signed up for a long-term contract hire arrangement and the car you’re renting is written off or stolen, you might end up owing the contract hire company more than your insurance company is willing to pay out.
You wouldn’t be able to afford to replace your car
You’re concerned that, because of your new car depreciating in value, you wouldn’t be able to afford to replace it.
GAP insurance is probably not suitable if…
GAP insurance only pays out if your normal car insurance company says that the car is written off or unrecoverable.
Your car is less than 12 months old and you’re the first registered owner
Most fully comprehensive car insurance policies offer ‘new car replacement’ during the first 12 months of ownership.
However, be careful to read the terms and conditions of your policy for any restrictions or exclusions. Some policies will not offer new-for-old where the car:
- has been stolen
- is subject to an accident where the insured is at fault
You’re already covered by your finance agreement
If you’re using a finance agreement that already covers you for the difference between the ‘book price’ (official value of the car) and how much you paid, you don’t need to add GAP insurance.
You could afford to make up for any shortfall in the insurance payout
Types of GAP insurance
The Financial Conduct Authority (FCA) is proposing a shake-up of the £1bn general insurance add-on markets including banning pre-ticked boxes, forcing firms to publish claims ratios and breaking the point of sale advantage for guaranteed asset protection (GAP) insurance, usually offered alongside car sales.
There are three main types.
- Finance GAP insurance. If you’ve borrowed money to buy the car, you might still owe more than the insurance company will pay out. Finance GAP insurance pays the finance company enough to cover your debt – you’ll be left with no car and no money, but at least you won’t be in the red.
- Return-to-invoice insurance. This is designed to top up the payment from your car insurance so that you get back exactly what you paid for the car (or any outstanding finance). This type of policy can be bought for both new and older cars.
- New car (or ‘vehicle replacement’) GAP insurance. This is like return-to-invoice insurance, but it’s designed to compensate for the rising cost of cars, or where a discount has been given on the cost of the car which may not be available again in the future. New car GAP insurance makes sure you get your money back plus a bit more, so you can replace your car for a new one of the same model and specification.
Of the three options, new car GAP insurance gets you the biggest payout, but you’ll probably find it’s the most expensive.
Watch the exclusions
GAP insurance might not cover you for as much as you’re expecting.
- It won’t cover any amount deducted by your main car insurance company. For example, if they reduce your payout because of unpaid premiums, salvage value or contributory negligence, these won’t be covered.
- GAP insurance will generally only cover excesses up to £250 of your claim. Higher or voluntary excesses above this amount won’t be covered. However, you can choose to purchase an additional insurance to cover this.
- It won’t cover any non-standard extras that you added to the car after you bought it, for example speakers and satnav.
- Nor will it cover warranty charges, insurance (premiums including GAP insurance), road fund licence and any other warranty or add-on in most cases.
- It may not cover anything you think your car insurance owes you. If your main car insurance company offers you less than the market value of the car, and you accept, the GAP insurer won’t make up the difference.
On top of that, you only get the money if:
- your insurance is fully comprehensive
- your car has been labelled a total write-off or unrecoverable
- you’ve made a successful claim and everything is settled (until then, you’ll have to manage your finance payments on your own)
Where to get GAP insurance and what it costs
Try the Which? website to get a better idea of costs and where to buy.
Shop around. You don’t have to take out GAP insurance as part of your car finance deal – in fact it’s often cheaper to buy it elsewhere.