Imagine a situation where you’ve bought a brand new car costing you around £40,000 and just over a year later it is stolen or written off. With the AA suggesting that a brand new car can lose up to 40% of its value in the first year, your insurer would be paying somewhere between £24,000 and £36,000 as the current market value. In the worst case that’s a loss of £16,000.
Of course the value of the car in this case depends on a number of factors, such as make, model and mileage. However, the reality is that you could have a significant ‘gap’ between what money you receive and the cost of a replacement new car.
Where GAP Insurance can be of high value
This is where GAP (or Guaranteed Asset Protection) insurance comes into play and will pay you the difference between this valuation and what you paid for the car, or what is left on your car loan or lease agreement.
Considering that if the car isn’t stolen or written off, it would still depreciate to the value of an insurance payout, is GAP insurance really necessary?
There are the different types of GAP insurances to meet different needs:
(1) Return to Invoice – Also sometimes known as Back to Invoice, this type of GAP insurance is designed to pay the difference between the insurance payout in the event of the car being stolen or written off, and the original invoice price.
(2) Vehicle Replacement Insurance (VRI) – If you would really want a new car to replace yours, you might consider VRI, which would ensure you got a similar age, specification and mileage car as your original when you bought it, even if the price has increased. That would mean brand new if your car was brand new.
(3) Finance Shortfall – When buying your car with a finance agreement, you would still be liable for the settlement of this loan even if you no longer could drive the car. Finance GAP insurance will settle that agreement if the amount owed is higher than the insurance payout.
As well as the obvious benefits associated with the different GAP options, there are some other advantages to protecting yourself. If you lease a car for example, you are still liable for costs until the end of the contract which GAP insurance can cover. Some lease agreements will require you to have GAP insurance to ensure you can pay any outstanding debt in the event you can’t drive the car.
Some policies will also take into account deals and extras in the payout, such as dealer discounts and insurance excesses. You can also get transferable cover and be insured for losses by all named drivers.
Qualifying for GAP insurance
Not every car is eligible or even worth insuring for these risks, and the criteria might be slightly different depending on your policy or insurer. You must have purchased your car from a VAT registered dealer within the last 180 days.
There will be an age and mileage limit on the car or van at point of purchase, usually around 8 years and 80,000 miles.
Always remember to compare prices and policies
With legislation saying car dealers cannot sell you GAP insurance at point of purchase, but must wait at least two days, this gives you the opportunity to compare their policy and price to the rest of the market.
A broker can talk you through options and give you a price and cover comparison so you know you are choosing the right protection for you.