Gap Insurance

What is gap insurance?

If you own a car, van, taxi, motorhome or even a motorbike, you’ll want to make sure your costs are covered in the event of theft or an accident.

Gap insurance is a type of cover which will pay the difference – the ‘gap’ – between what you paid for your car, and the amount an insurer will pay out at the point of a claim.

The value of a car will depreciate the moment you drive it away from a forecourt. The drop in value can be up to 40% alone in the first year of ownership.

Insurers will only pay out what the car is worth at that time, which is likely to be less than you paid for it. Guaranteed asset protection (‘gap’) means that the total value of the claim pay-out should equal the sum you initially paid for your car.

Why would I need gap insurance?

Buying a new car can cost a lot of money. If you have an accident and your car is damaged, replacing it can be extremely expensive. However, some cars will depreciate faster than others. There is a range of factors which affect depreciation, including make, model and even colour in some cases.

Depreciation is the fastest for brand-new cars. The value of a brand-new car drops by up to one-third the minute you drive it away from the dealership.

It is possible to take out gap insurance on second-hand cars too. However, as the value of a second-hand car is usually already a lot lower than when a new one is, most gap insurance policies tend to cover new vehicles.

Types

What type of gap insurance is available will depend on the type of car you have. It can also depend on where you bought it.

Vehicle replacement insurance: This policy, sometimes called VRI, will pay the difference between an insurance pay-out, and the cost of a new car. The new car must be a similar make, model and specification. VRI cover is only usually available for cars under three months old. Mileage will also usually be limited to under 1000 miles.

Return to invoice: RTI policies will cover the difference in cost between an insurance payout and the price you paid for the car at the time of purchase.

Return to value: RTV cover bridges the gap between a claim pay-out and the value of your car at the time you take out a gap insurance policy. Insurance providers may have a range of clauses, for example, a minimum ownership period, or threshold value.

Should I take out gap insurance?

There are two main reasons for taking out a policy.

1. You want a brand new car.

If you buy a new car, which is written off soon after you purchase it, an insurer will only pay out the value of the car at the time of write-off. For example, a brand new car you pay £50,000 for could be worth only £30,000 after one year. This would not be enough to replace your loss with a brand-new car.

2. If your car is paid for on finance.

Many people take out finance to buy a car. The full loan amount will always be repayable to the finance company. This applies even if the car is written off. You could end up repaying your finance at the original value of your car, even if your insurance pays out a lower amount and you have to replace it with an older or lower-spec model.

Is gap insurance worth the money?

This is a tricky question, as every circumstance is different. As an example, if you buy a car costing £10,000 and write it off after a few years, it could be worth as little as £5000. This amount is unlikely to be able to buy a newer equivalent car. If having a new car is important, you would have to make up the difference yourself.

In this case, having gap insurance would mean a pay-out at the current value of the car from your insurer (£5000) PLUS an additional pay-out from your gap insurance policy of £5000.

This will mean you are able to replace your car with a suitable newer replacement at no extra cost.

How can I get cheap gap insurance?

Gap insurance is usually available from both car dealerships and specialist insurance brokers. As with everything, there is a wide range in the level of cover available. Costs can also vary a lot, depending on your personal circumstances, so it is worth shopping around.

• Compare quotes from a range of providers. Often, policies offered by dealerships are more expensive than those found online.
• Ask for a better deal. If you have a range of quotes, it can be worth asking a broker if they are able to offer a better deal.
• Make sure you are only paying for the cover you need.

Frequently Asked Questions