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Gap insurance explained

When you buy a new car, gap insurance offers an extra level of cover you may want to consider getting a quote for. It covers the ‘gap’ between the cost of your new car, or the finance you took out to buy it, and what your insurer might pay out. Read on to find out more.

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Two cars in the road following and accident or crash, red warning triangle in front of themWhat is gap insurance?

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What is gap insurance? 

Gap insurance is more formally known as Guaranteed Asset Protection. It may also be called car gap insurance. 

The idea behind it is that it plugs the gap between your car insurer’s payout when you make a claim and the cost of the car when you bought it - or the value of the loan you took out to buy the vehicle.

For example, if your car is written off or stolen, your insurer will only pay out the resale value of your car at the time of your claim. This will be less than you paid for the car and may not be enough to pay off the finance you took out to buy the car. 

If you want a little extra protection, buying gap insurance will ensure you don’t lose the extra money.

Gap insurance can provide useful additional cover when purchasing a new car, or even a second-hand one. However, it’s not a substitute for a standard car insurance policy, which you are still legally obliged to take out.

You can easily run a gap insurance comparison online.

Do I need gap insurance?

The effect of depreciation means the value of cars can fall rapidly, particularly in the first few years of ownership. In fact, figures from the AA state that new cars can lose up to 60% of their value in their first three years on the road.

If you buy a brand new car and need to claim on your insurance a year or two later, the vehicle’s value may have decreased significantly, putting you out of pocket.

This can be particularly problematic if your car is subject to a finance agreement or you took out a personal loan to purchase it. If you have to make an insurance claim early on, you may have a shortfall between your insurance payout and the amount you have outstanding on your car’s finance contract or loan payments (which you will still be liable for if your car is written off).

Taking out gap insurance will ensure you don’t lose out financially.

Can you take out gap insurance on a used car? 

Gap insurance isn’t just for brand new cars — there are different types that can cover a used car too, usually if it’s less than seven years old. 

New car gap insurance 

Even if you’ve had your car for a while you can take out cover to pay out the value of the car at the time of purchasing the gap policy. We run through the different types of gap insurance below.

Is gap insurance worth it?

Gap insurance may be worth the cost if you’re concerned about not getting the original value of your car back if it’s written off by your insurer.

You might find gap insurance is particularly valuable if your car is on a finance agreement or you have outstanding payments on a personal loan. 

If you suffer a total loss and your car’s value has depreciated, you might find there’s a shortfall between how much you receive from your insurance claim and how much you still have to pay off for your car. 

This could mean you end up paying finance instalments on a car that’s not even on the road anymore. But the finance company may also insist you pay off the loan entirely.

You may never need to make a claim on your insurance for a total loss, but car gap cover can give you peace of mind that you will get enough of a payout to purchase a new car to replace yours in the event it is destroyed or stolen.

What type of cover does gap insurance offer?

There are different types of gap insurance coverage, but they all work to cover the gap between the insurance payout and the true value of your car, whether that’s at the point you bought it or when you took out gap cover.

Here’s an example of how gap insurance could protect your car’s value:

You purchase a new car from a dealer for £10,000. A year or two later you crash your car and your insurer declares it as a total loss (also known as being written off). Your insurer pays you £7,000 — the value of your car at the time of your claim. 

If you took out a gap insurance policy this will pay the difference between the insurance payout and the value of the car (whether that’s the value of the car at the time of purchase or at the time of taking out the policy will depend on the type of cover).

Types of gap insurance

There are three types of gap insurance. We’ve outlined these below so you can decide which type of cover best suits your needs:

  • Return to value (RTV) insurance: This type of policy covers the difference between what the insurer pays and the value of your car when you take out the gap insurance. When you take out a return to value policy the gap insurer will value your car and this will be the figure used when calculating a payout.

  • Return to invoice (RTI) insurance: This level of cover will pay the difference between your insurance payout and the price you paid for your car (ie its invoice price) if you bought it in the last three months, whether you bought your car new or used.

  • Vehicle replacement insurance: As the name suggests, vehicle replacement cover will provide you with a payout to replace your car with a brand new car of the same make, model and specification, even if the price for a new car has increased since you originally bought the car.

How much does gap insurance cost? 

The cost of gap insurance will vary depending on the provider and the policy, but you can typically expect to pay anywhere between £100 and £300 for a multi-year policy.

Which are the best gap insurance providers?

It’s easy to compare gap insurance providers online to find the best one. As well as comparing the cost, it is also worth searching for gap insurance reviews to see which provider gets the best feedback. 

Where to buy gap insurance

While you can buy gap insurance from your dealer when buying a new car, you could find this more difficult than in the past. 

New rules came into force in September 2015 to help buyers get a better deal when buying gap insurance, after an FCA report found that more than two-thirds of buyers were unsure of how much they had paid for their cover.

The rules introduced a deferral period, meaning gap insurance cannot be introduced and sold on the same day. You can still get gap insurance from your car dealer but may have to wait four days after buying your car (unless the dealer had provided you with the required information previously).

Fortunately, you can also buy a gap insurance policy online – and the advantage is you’ll often find cheaper gap insurance quotes than if you buy it through your car dealer.

Compare gap insurance

Choose from a range of gap insurance policies with Uswitch and money.co.uk*

The GAP insurance comparison service is provided by money.co.uk, which is a trading name of Dot Zinc Limited, registered in England (4093922) and authorised and regulated by the Financial Conduct Authority (415689). Registered address: The Cooperage, 5 Copper Row, London, England, SE1 2LH. By using this system you are agreeing to our Terms and Conditions and Privacy Policy.

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