WHAT IS GAP INSURANCE?

Guaranteed Asset Protection (GAP) insurance, also known as shortfall insurance, is a finance product that you can purchase to cover the difference between the amount you receive from your insurance provider in the event of a total loss claim and the amount you paid for the car, or the amount you have left on your finance agreement.

Typically, GAP insurance is sold when you buy a brand new car to provide protection against the rate of depreciation. If your new car gets stolen or written off after an accident, your insurance provider will only pay out the car's current market value, not the amount you paid for it.

The AA suggest that, on average, a new car loses around 40% of its value in the first year, and around 60% by the end of year three.

Let's suggest you buy a brand new car that costs £12,000. Unfortunately, you're involved in an accident three years later that results in the car being written off. Using these figures, your insurance provider will only offer you a settlement figure of £4,800.

While this is enough for you to buy a replacement car, it isn't enough to buy an equivalent brand new car. Similarly, if you took out a finance agreement, it's unlikely to be enough to repay the remainder of your finance deal.

GAP insurance is designed to bridge the gap between the market value of the car and the money you've spent purchasing it so that you're not left out of pocket if you have to make a total loss claim.

ARE THERE DIFFERENT TYPES OF GAP INSURANCE?

Yes, GAP insurance largely falls into one of five different categories:

FINANCE GAP INSURANCE

As the name suggests, this form of GAP insurance is for when you take out a finance agreement on a car (usually PCP). It helps you pay off any outstanding finance should the car be written off or stolen.

For example, you purchase a new car costing £12,000 on finance with a 10% deposit and 18 months into the agreement the car gets written off. The car is valued at £6,000, but you still owe £10,000 to the finance company.

Finance GAP insurance will pay the additional £4,000 so you're not left paying that bill for a car you can no longer drive.

RETURN TO INVOICE GAP INSURANCE

Also referred to as RTI, Return To Invoice cover makes up the difference between the price you paid for the car and the settlement figure offered by your insurance provider after a total loss claim. It's best used when you buy a car outright in cash.

For example, you purchase a new car costing £12,000 from a dealer with cash, but 18 months after purchase the car gets written off. The car is valued at £6,000 so your RTI policy will pay the difference of £6,000 allowing you to get an equivalent car.

RETURN TO VALUE GAP INSURANCE

Similar to Return To Invoice, Return To Value cover pays the difference between the market value of the car when you bought it and the market value at the time of the total loss claim. It's better to use this form of GAP insurance if you get a discount on your new car.

For example, you purchase a new car for £12,000 from a dealer with cash, but the car is actually worth £13,500. After 18 months the car gets written off and is valued at £6,000. Your Return To Value policy will pay the difference of £7,500 even though you paid £1,500 less when you bought the car.

VEHICLE REPLACEMENT GAP INSURANCE

Vehicle Replacement GAP insurance is almost identical to Return To Value cover except that it pays out the new market value of the car at the time of the total loss claim.

This is often the most expensive type of cover because it can pay out the biggest difference. It's best to take it out when you buy a brand new or ex demo vehicle.

For example, you purchase a new car for £12,000 from a dealer with cash, but 18 months after the purchase the car gets written off. The car is valued at £6,000 but the very same model is now £13,750 if you were to buy it brand new again.

Your Vehicle Replacement policy will pay the difference of £7,750 so you can get an exact replacement.

CONTRACT HIRE / LEASE GAP INSURANCE

This type of cover is similar to Finance GAP insurance; however, it's specifically to protect someone that has taken out a lease finance agreement where there is no possibility of them owning the car at the end of the contract.

For example, you agree to lease a car for £150 a month over 36 months, but 18 months into the agreement, the car gets written off. Your Contract Hire GAP insurance policy will pay for the remaining months and cover any early settlement fees.

CAN I GET GAP INSURANCE ON A USED CAR?

Absolutely, most GAP insurance providers will offer policies for cars up to seven years old. Beyond this point the rate of depreciation has significantly slowed down so the financial risk is far less.

GAP insurance is more useful on a new car because they depreciate quicker, so the difference between the amount you paid and the settlement figure from the insurance company will be much greater.

Having said that, a used car is any vehicle that has had more than one registered keeper, so they could be as young as 12 months old and still susceptible to fast rates of depreciation.

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WHEN IS GAP INSURANCE WORTH BUYING?

GAP insurance is not a compulsory finance product to add when you're buying a new car; however, there are instances where it makes sense to protect your financial well-being.

TAKING OUT A FINANCE AGREEMENT

According to figures from the Finance and Leasing Association (FLA), 86.5% of new private cars were purchased through a finance agreement in 2017. The total number of new and used cars sold on credit reached 2.32 million, with majority of customers opting for a PCP contract.

Finance agreements give people the opportunity to drive a new car having put down a small deposit, spreading the cost over 48 months and having a large chunk deferred until the end in the form of a balloon payment.

This, combined with rapid depreciation rates and interest on the monthly payments results in many customers remaining in negative equity - or 'upside down' - for the majority of the finance agreement.

Therefore, if the car is written off, it is highly likely you will still owe money to the finance company which you will have to pay back even if you can no longer drive the car.

CHOOSING A CAR THAT DEPRECIATES QUICKLY

The depreciation rate of a car is dependent on a number of factors including price, running costs, mileage and quality. Typically, a car will lose around 50% - 60% of its original value in the first three years; however, not all cars depreciate at the same rate.

If you decide to buy a car that tends to lose its value more quickly, the difference between the price you paid and the current market price at the time of a total loss claim will be far greater and you will stand to lose more money.

WANTING TO RECOUP THE FULL AMOUNT YOU PAID

Buying a car is a huge investment and one that is only going to decrease in value (unless you hold on to it for decades and it becomes a classic).

For example, you buy a car worth £20,000 that gets written off after 15 months and is valued at £14,000. If you aren't happy to accept the lower amount offered by the insurance company - even though it's enough to buy a replacement - GAP insurance is worth investing in.

WHEN IS GAP INSURANCE NOT WORTH BUYING?

As already mentioned, GAP insurance is not essential and some customers will see it as just an unnecessary additional cost.

IN THE FIRST 12 MONTHS OF OWNING A BRAND NEW CAR

Most comprehensive car insurance policies offer 'new car replacement' during the first year when you buy a brand new vehicle as the first registered keeper.

With this in place, you will be entitled to a brand new car of the same make, model and specification, so you won't need the added cost of GAP insurance.

However, it's important to be aware that some policies will not offer new car replacement where the car has been stolen or the car is subject to an accident where the insured is at fault.

YOU CAN AFFORD TO MAKE UP THE SHORTFALL

Taking out GAP insurance isn't worth your investment if you can afford to supplement the difference between the current market value and the price you orginally paid or the amount left on your finance deal.

YOU'RE HAPPY WITH GETTING A CHEAPER REPLACEMENT

As opposed to someone that is unwilling to potentially lose thousands of pounds on a car when it's written off or stolen; if you're happy to accept the settlement figure and buy a new car with that money, GAP insurance is unnecessary.

After all, the settlement figure is based on the current market value of your car, so you should be able to find a car of the same age and condition, leaving you no worse off.

YOU'RE BUYING AN OLDER USED CAR

According to CAP, a three year old car is only likely to drop 14% in value in the first year of ownership, followed by 24% in the second year, reaching just 33% in the third year.

Therefore, the difference between the amount you paid and the current market value will be much less making the GAP insurance policy far less valuable compared to one for a brand new car.

THE CHANCE OF NEEDING A GAP INSURANCE POLICY

Research from the RAC claims that only 4 in every 100 cars are written off which roughly translates to 450,000 vehicles per year. Essentially, you're covering yourself against a 4% risk of your car being taken off the road following an accident.

Similarly, there are just 76,000 reported car thefts on average each year. Although there is only a slim chance that you will need to claim on a GAP insurance policy, if you've bought a car on finance, bought a quickly depreciating car or want to recoup the full amount you paid, it's worth having this additional cover to protect yourself from serious financial loss.

March 15, 2019 at 12:17 PM


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