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Gap insurance explained
Gap insurance is designed for new car owners, particularly those buying on finance
In this article
- What is Gap insurance for?
- Does Gap insurance cover the full value of my car?
- When is Gap insurance needed?
- Do you have to buy Gap insurance from a car dealer?
- Can you take Gap insurance out at any time?
- How to shop around for Gap insurance
- Which kind of Gap insurance is best for you?
- How to claim on your Gap insurance
What is Gap insurance for?
Gap insurance (guaranteed asset protection) protects you when you buy a new car. It's designed to cover the difference between the amount your insurer would pay out if your car was stolen or written off and the price you paid for the vehicle.
Suppose you've just spent £15,000 on a car, or have taken out finance for that amount. You drive the car home, and then a week later, it's stolen or written off in an accident.
Your car insurer hands you a cheque for £10,000. You paid the dealer £15,000 – but by the insurer's estimates, £10,000 is what the it's actually worth, as cars depreciate notoriously quickly.
This leaves you £5,000 down or, even worse, potentially in debt to the tune of £5,000 (plus interest) to the finance company for a car you no longer own.
Where your car is a total loss, Gap insurance is designed to work alongside your standard car insurance. It tops up the difference between what they will pay and what you'll actually need to get back on the road.
Does Gap insurance cover the full value of my car?
Gap insurance won't directly replace your car or pay you its full value, and you'll need regular car insurance.
Instead, depending on the type of cover you buy, it will ensure that after your car insurer's settlement is paid, you're not left short of what you need to clear off your finance debt or purchase a replacement of the same make and model.
It can also help to bridge the difference between what your main insurer has paid and what you paid to buy the car in the first place.
- Find out more: the best car insurance providers.
When is Gap insurance needed?
We think Gap insurance can be useful and is worth considering, but it won't make sense for everyone.
Generally speaking, Gap is likely to be worthwhile in the following situations:
- You used a large loan to buy your vehicle
Gap insurance can offer a means of paying off outstanding finance on your car, which means if your car's stolen or damaged beyond repair, you won't have to continue to make payments on it.
- You're concerned about the depreciation of your vehicle
The quicker your car loses its value, the less your insurer will pay after a total loss incident, compared with what you paid for it. Gap insurance means you'll get more back.
- Your car is on a long-term lease
If you have a long-term rental agreement for a vehicle with a mileage allowance, a write-off could leave you without a car and a bill for thousands of pounds. Gap insurance can help protect against this.
What about the 'new car replacement' cover in my car insurance?
Most car insurers offer 'new car replacement', which means that if your car is brand new, the insurer will provide a like-for-like replacement if it's stolen or written off in its first year.
Gap insurance can usually only be bought up to a year after your car, but some providers allow you to defer cover until year two if you'd prefer to rely on your new car replacement cover during year one.
If you're considering this, bear in mind that new car replacement cover is subject to conditions and doesn't fully replicate the protection of Gap insurance. In some scenarios, you could still potentially face a cash shortfall.
- Your car insurer may revert to paying a cash settlement if a like-for-like replacement isn't available, or if the costs of damage to the car aren't high enough (typically 50% to 60% of the car's list price). The settlement won't necessarily be the same amount you paid for the car or the amount you borrowed on finance.
- If you're using finance to pay, the finance provider doesn't have to accept a replacement vehicle from the car insurer. They may insist on you paying off the full finance amount in cash.
Carefully check your car insurance T&Cs and your finance provider's policies on replacement vehicles to ensure you have cover you're comfortable with.
Do you have to buy Gap insurance from a car dealer?
No, you don't. Many people are introduced to Gap insurance in a car dealership, as it's usually offered as part of the bundle of 'extras' that sales staff will try to get you to buy.
However, while Gap insurance is a worthwhile product, your dealership probably isn't the best place to buy it. It can often be found much cheaper online, sold directly by insurers and brokers, or via comparison sites.
Dealerships selling Gap insurance must tell you the following before you buy a policy:
- The total premium for the Gap insurance.
- The length of the policy.
- The features, benefits, unusual exclusions and limitations of the product.
- The product can be bought elsewhere from standalone providers.
- Whether Gap insurance is an optional or compulsory add-on to the sale of the vehicle.
In addition, dealerships can't sell you Gap insurance on the same day they sell you a car. There must be at least a two-day break, unless you decide to waive the waiting period.
If you wait two days or longer, the provider should go over the policy details again. The decision to waive the waiting period must be initiated by you – the dealership can't suggest it.
Can you take Gap insurance out at any time?
Usually not. Unlike standard car insurance, which you purchase annually, Gap insurance coverage can last for up to five years. But it usually needs to be bought within the first year of owning your car, even if you defer the cover so it only kicks in from year two.
This 'window' can vary by provider, however.
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How to shop around for Gap insurance
As with standard car insurance, you can compare Gap insurance policies online to find the cheapest deal for you.
Whatever policy you choose, check the key features before you buy. The following are just some of the important elements you should look out for:
- Length of the policy
- Excess
- Any significant exclusions
- The value of your vehicle
- How to claim on your policy
- How to cancel your policy if you no longer need it.
Which kind of Gap insurance is best for you?
There are many types of Gap insurance products, with different providers offering their own unique spin, or combinations of cover.
While some are more basic than others, they're suitable for different purposes. Which one is best for you depends on your purposes.
Finance Gap insurance
One of the most basic products on the market (and quite often a feature of other types of Gap cover), this helps you pay off any outstanding loan payments on your car if it's written off.
However, this usually won't include payments for negative equity.
Negative equity Gap insurance
If your finance settlement (the amount you've borrowed) is higher than the cost of your car, the extra sum is referred to as 'negative equity'.
This usually happens when you part-exchange a previous car before paying off its finance, transferring the remaining debt from that loan to your current car. A finance Gap insurance payout won't cover this older debt. Negative equity Gap Insurance will.
Vehicle replacement Gap insurance
Rather than helping you reach the amount you paid for the car, vehicle replacement cover bridges the distance between your car insurance payout and the cost of replacing your vehicle with a new one.
Return to value Gap insurance
Return to value Gap is similar to return to invoice Gap insurance, but instead of helping you get exactly what you paid for the car, it pays the difference between your car insurance settlement and the vehicle's value when it was first purchased.
This could prove useful if you bought the car second-hand or you've had the vehicle for a long time.
Lease gap insurance
If you leased your car rather than buying it outright, lease Gap insurance helps you pay the remaining balance of your contract and any fees that may apply if you cancel your leasing agreement early.
How to claim on your Gap insurance
Once your car insurer has offered your settlement, you can make your Gap insurance claim.
Check your Gap insurance T&Cs before you start the claim. Check whether there are any time limits for submitting your Gap claim, what your excess is and what information you'll need to have ready for them.
It's best to speak with your Gap insurer before accepting any settlement from your car insurance provider. Many Gap providers insist you speak to them before agreeing to a claim.
If you have finance as part of your Gap insurance policy, it's worth discussing how any outstanding loans will be settled and whether they will be paid on your behalf.
Unsatisfied with the response? Complain
If your Gap insurer doesn't handle your case in a fair and timely manner, don't be afraid to complain. Details of how to do this should be listed on your policy document.
If you've exhausted the insurance company's complaints procedure and your claim has not been settled, contact the Financial Ombudsman Service (FOS).
You usually have six months from the time you reach a deadlock with the insurer to make a FOS complaint.
Video guide: gap insurance explained
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