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Gap insurance explained

Written by Kasey Cassells, Senior content editor

20 April 2018

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

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What is gap insurance? 

Gap insurance is more formally known as Guaranteed Asset Protection. Gap insurance is a vehicle replacement insurance for cars that plugs the ‘gap’ between your car insurer’s payout (when you make a claim) and the price of your car when you bought it or the value of the loan you took out to buy it.

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Gap insurance can provide useful additional cover when purchasing a new car. You can also buy gap insurance when buying a second-hand car up to seven years old. However, it’s not a substitute for a standard car insurance policy, which you will still need to take out. 

Do I need gap insurance? 

If you need to make a total loss claim (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 you may want to consider gap insurance.

The effect of depreciation means the value of cars falls 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, its value may have decreased significantly, putting you out of pocket as you paid the value for the car when it was new.

This can be a particular problem 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).

Is gap insurance only for new cars? 

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. 

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. You can learn about the different types of gap insurance cover below.

Is gap insurance worth it?

Gap insurance may be worth the investment 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 worth it 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 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 does gap insurance cover?

There are different types of gap insurance, 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).

What are the different types of gap insurance?

There are three types of gap insurance. Learn about each one and 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 took 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 they use 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 (i.e. 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 is gap insurance? 

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.

Where can I 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. 

To get the best gap insurance policy for you, you can compare gap insurance quotes below:

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

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