GAP insurance: a guide

You may have heard of it, you may even have signed up for it, but do you really know about GAP insurance? The truth is, GAP insurance could save you a fortune, so follow our guide to why you might need it and when you should buy it.

What is GAP insurance?

GAP stands for Guaranteed Asset Protection – the asset being your car, motorbike or van. Most car insurance policies pay out if your car is written off or stolen. However, the figure your insurance company will use to determine how much they pay is based on the current market value of your car.

But what if the outstanding finance on your car is more than the market value? You could be left with a hole in your pocket – and your garage – unless you have GAP insurance.

GAP insurance is calculated on 110% of the Glass’s Guide price for used car values. The policy can cover either the amount of finance taken out, or the cost of the car.

Types of GAP insurance

Return to Invoice: RTI GAP insurance makes up the difference between the original purchase price of the vehicle and the amount paid out by your car insurance policy. This means it can be used for a car that you own outright as well as those bought on finance.

Example: If you paid £25,000 for your car with a £2,000 deposit, you’d have a loan of £23,000. If your car is stolen or written off 18-months later and you still owe £17,000 to the finance company, your insurer will pay out a depreciation rate of £14,000, and RTI GAP insurance will cover the remaining £11,000.

Finance GAP: Finance GAP covers the difference between any outstanding finance on the vehicle and your car insurance policy pay out. This means it can cover you for a larger amount than RTI GAP but is only suitable for cars bought on finance – loans, contract, hire purchase or lease purchase.

Example: If you paid £25,000 for your car with a £2,000 deposit, you’d have a loan of £23,000. If your car is stolen or written off 18-months later and you still have £17,000 owing to the finance company, your insurer will pay £14,000. Finance GAP insurance will cover £3,000.

Replacement GAP: The third type of GAP insurance covers the cost of replacing your vehicle with a new one, or one of equivalent age, within a limit specified by the policy. This can be applied to new or used cars.

Example: If you paid £25,000 for your car with a £2,000 deposit, you’d have a loan of £23,000. If your car is stolen or written off 18-months later and you still have £17,000 owing to the finance company, your insurer will pay £14,000. Replacement GAP insurance will pay the difference between the insurance payout and the cost of a brand new car. However, this payment is made to the motor dealer.

You can also get a combination of RTI and Finance GAP that pays whichever sum is the largest, offering extra security, as well as separate plans for motorbikes and commercial vehicles.

The pros

• Peace of mind: Knowing that, should the worst happen, you won’t be out of pocket or without a car for long.
• Less hassle: You won’t have to spend time and effort negotiating with your car insurance company over the value of your (ex)-car.
• Good timing: Car sales are falling in the current economic climate, so too are used car values. This means a financial gap is more likely.

The cons

• Cost: There’s always a risk you could end up paying for GAP insurance which you never use.

Is GAP insurance right for you?

So if you have a large amount of finance owing on your car, or your savings are such that you’d struggle to pay the difference should something happen to your vehicle, consider GAP insurance.

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