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Mind The Gap! What is gap insurance – and do I need it?

If you’re buying a car from a dealership, the salesperson will probably offer you gap insurance. But what is it and do you really need it? Really?

What is Guaranteed Asset Protection (GAP)?

When you buy a new or used car from a dealership, there’s a good chance that you’ll be offered gap insurance at the same time. You’ll probably be told that it's vital to protect your car and it’ll be money well spent. 

We all want to protect a car we’ve just bought, but should we fall for the sales patter?

A gap (guaranteed asset protection) insurance policy can protect your car, because it covers the difference between how much you paid for it and the amount that an insurance company would pay out if it was written off or stolen.

The reason gap insurance exists is depreciation. It's a cliché to say that a car starts to lose money as soon as you drive it off a forecourt, but it's true: it can almost instantly lose a third of its value, 40% over the first year and, depending on the make and model, up to 60% over the first three years. 

So if you’re unlucky enough to have your car written off or stolen, your regular insurer will pay out what it's worth at the time that happens. But as this is likely to be less than what you paid when you bought it. If your car is brand new there will be a 'gap' between what your insurer pays out and how much you originally paid.

This gap is what is covered by gap insurance. 

Is gap insurance right for me?

Gap insurance isn’t for everyone, but it's a good idea for some car buyers.

For example, if you’ve borrowed money to buy your car, or have car finance such as a personal contract purchase (PCP), and then it’s stolen or written off, what the insurance company pays you will probably be less than the loan you took out. Gap insurance will make sure that you get back everything that you borrowed, so you’re not out of pocket. 

The other reason for taking out gap insurance is if you want a brand new car to replace the one that you’ve lost to theft or damage. What a regular insurance policy will pay out will be the value of your car when it had to be replaced – which is what you paid for it, minus the depreciation since you bought it. 

If you want a car that is comparable with what you originally bought, then, yep, you’ll need gap insurance.

But gap insurance doesn’t work for everyone

Gap insurance is unnecessary for many car buyers, though, so beware a smooth-talking salesman who could talk you into taking out a policy that you don’t need.

Used cars, for example, have already lost much of their original value and depreciate at a slower rate than a new car. The insurance ‘gap’ could therefore be much narrower than with a new car. (If you borrowed money to buy it, though, gap insurance could be worth investing in.)

You might also have a fully comprehensive insurance policy that covers loss or damage, so you don’t need gap insurance. Most policies of this type offer new car replacement in the first year (some cover two years), so check your policy before taking out gap insurance.

Finally, if your replacement car doesn’t haveto be brand new, then don’t bother with gap insurance. Your regular insurance will pay out enough to get a comparable replacement. 

Where do I buy gap insurance?

You can buy it at a dealer (it’s a useful source of extra profit for them) – although they’re no longer allowed to sell it to you at the same time as they sell you the car: there has to be a 48-hour ‘cooling-off’ period between told the cost and actually being able to buy it.

However, as with most things these days, it’s cheaper online, where specialist gap insurers often charge a fraction of what dealerships quote.

Are all gap insurance policies the same?

No, they’re not. 

There are a number of different types of gap insurance, depending on what you need.
‘Contract hire’ insurance, for example, is best suited to buyers who have a lease deal that doesn't have an option to buy at the end. Your regular insurance will cover the current market value of the car, with the gap insurance covering any remaining payments.

Then there’s ‘back to invoice’ insurance policies, which pay the difference between what your insurance company pays out and either the original amount you paid, or the amount you owe a finance company.

Another popular form of gap insurance is ‘vehicle replacement insurance’, which pays out the difference between what your insurer will pay you and how much a comparable brand new car would cost or, if your car was used, how much it was when you originally bought it.

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