What is car GAP insurance?

We explain GAP and finance GAP insurance for cars, and ask whether you really need it!

When caught up in the excitement of a new car purchase, it’s easy to fall for a salesperson’s smooth repertoire, and car GAP insurance is one added extra that will often be part of the sales pitch – even though dealers are now barred from selling cars and GAP insurance on the same day.

But what is GAP insurance and why might you need it? The sales pitch may sound plausible, but unless you’ve fully understood what any GAP insurance quote is designed to cover, you may find that seemingly reasonable GAP or GAP finance insurance cost is actually an unnecessary or unwarranted expense.

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GAP insurance stands for Guaranteed Asset Protection, and in simple terms it means you can purchase a brand new replacement car if yours is written off. But isn’t that what a ‘normal’ comprehensive car insurance policy is supposed to do? Well, no. Standard car insurance policies aim to return the policyholder to the position they were in at the time their car was written off – GAP insurance can cover the insurance shortfall.

In other words, if you’ve had your ‘brand new’ car for three, six, or twelve months already, it’s value will have already slumped considerably against the amount you paid for it. That process is called depreciation, and claiming on GAP insurance is designed to recover the difference between the actual insurance valuation of a car with months and miles under its belt at the time it’s written-off, compared to the cost of brand new replacement.

When should you consider GAP insurance?

Like all insurance purchases, GAP insurance is effectively a gamble. The insurance company and person buying an insurance policy must both weigh-up the odds of a claim being made, and set a value on insuring against that risk.

Of course, the insurance company holds all the cards, because even if a driver knows the odds of their car being written-off are actually miniscule, they usually can’t afford to meet that ‘worst case scenario’. The study of statistics means an insurance company can predict with much more accuracy how many of its policy holders are likely to crash, be burgled or suffer a house fire though, and aims to set premium prices to make sure it never loses.

It’s exactly the same with GAP insurance. Although the risk of writing-off your car may be minimal, insurance companies are playing on your fear that a second-hand replacement of equal value at the time of write-off – which is all that comprehensive insurance guarantees – will not be as satisfactory as another brand new car.

Most car buyers accept depreciation as a necessary evil, of course, but GAP insurance policies are mostly signed in the showroom with that heady new car smell in your nostrils. Before you sign the paperwork, take a moment to consider how you’ll feel about your car in, say, 18 months, and whether at that point you’d be happy with a ‘like-for-like’ replacement. That’s if you’re unlucky enough to write the car off in the first place.

Reasons you may NOT need GAP insurance

First, if you’re resigned to accepting the depreciation in your new car’s value over time (and let’s face it, if you’re not you probably shouldn’t have bought it!), then GAP insurance may seem like an unnecessary expense. You know that 18 months down the line your car is no longer ‘new’, and you may not see the value in paying extra for a policy that gives you more than your car is worth at the time of write-off.

The second point to remember, is that it’s vital to check the terms of your comprehensive motor insurance. Most fully comp policies have a clause in the small print that if you suffer a write off in the first twelve months of ownership, you’re guaranteed a brand new replacement. Some policies even extend this ‘new replacement’ period to 24 months – so check your policy details carefully before signing up for extra GAP insurance.

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Thirdly, if you’re buying a second-hand car, depreciation rates are typically much slower than for showroom fresh models. This means your car’s initial purchase and subsequent write-off values will be much closer together, so any potential shortfalls may be so small that it’s hard to justify getting the GAP insurance.

The different types of car GAP insurance explained

While the principles of all GAP insurances are broadly the same, as you’d expect in a busy financial product marketplace there are a variety of different GAP insurance products targeting different ownership scenarios. We’ve trawled through some of the GAP insurance options to help you understand what the product names and terminologies mean.

Return to invoice GAP insurance

This type of insurance simply makes up the shortfall between a depreciation-adjusted insurance write-off payout, and the actual amount you paid for your car.

Vehicle replacement GAP insurance

Instead of making up the shortfall against your invoice, this type of GAP insurance makes up the difference to the actual cost of a new, identical replacement model. This may be higher or lower than the original invoice cost.

Return to value GAP insurance

Unlike return to invoice GAP insurance this version of cover is for any shortfall between the write-off valuation and the car’s value when you bought it – so it’s more applicable to second hand cars.

Finance GAP insurance

As the name suggests, this type of GAP insurance aims to cover outstanding loan amounts if you write-off your car. It’s not necessarily tied into your car’s actual purchase value, but the amount you borrowed when buying it.

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Getting the best GAP insurance deal

If you’ve decided that GAP insurance is right for you, there are Financial Conduct Authority regulations in place designed to protect your rights. Since 2015 it has been against the rules for a car salesman to sell GAP insurance at the same time as selling you a car, and there has to be a minimum two-day period between the two sales. This is designed to counter historical miss-selling, and give you a chance to shop around for better rates or cover.

To research buying GAP insurance, you should use the same methods as for any other insurance. This typically means checking a range of online and telephone insurance brokers for quotes and cover details, before picking the product that suits you best.

Be alert to car dealers including GAP insurance premiums in car finance quotes too, as their rates are likely to be much higher than those you can get elsewhere.

Remember too, that unlike ordinary car insurance (third party), GAP insurance is not a legal requirement. If you don’t want it, don’t pay for it. If you have any problems or disputes with a GAP insurance provider, whether that’s in terms of the way a policy has been sold or the way a claim has been dealt with, make a formal complaint to the insurer in the first instance. After that, you can try raising the case with the Financial Ombudsman, the independent adjudicator should be able to get a resolution for you.

Have you ever taken out GAP insurance on a car purchase? Tell us about your experiences in the comments…