What is 'Gap insurance'?
If your car gets written off or stolen, most insurers will pay the current market value of your car. Guaranteed asset protection, or gap insurance, will top up the amount you receive from an insurance claim to a pre-determined amount.
From 1 September 2015, some of the rules have changed on how car dealers can sell you the product, so here's our timely guide to what it is and how it works.
What is Gap insurance?
If you were to lease a vehicle over three years but were then involved in an accident, you'd still be locked into the lease agreement for the full three years. Alternatively, were you to buy a brand new car and had an accident on the way out of the forecourt, it's unlikely the money you'd receive from your car insurance would cover the cost of buying another new vehicle.
Gap insurance pays out any debts you incur as a result of having to replace a vehicle in the above scenarios.
What should I look for?
Gap insurance terms aren't standardised, so it's very difficult to directly compare different products on a like for like basis. You'll need to be careful when selecting a policy to make sure you understand the cover you are buying. Some of the most common types of product are:
Finance Gap insurance
The most basic product is known as finance gap insurance. Essentially, this will pay off any debts you have from financing the vehicle in the event of a write off. Lease gap cover is similar, but covers lease hire, rather than on-credit purchases.
Vehicle replacement Gap insurance
If you are unfortunate enough to lose a vehicle or have one written off, you'll probably find your car insurance will pay compensation worth the 'fair market value' of the vehicle. You could be forgiven for thinking this is the cost of replacement, but it isn't necessarily, and sometimes it falls short of what you really need to buy a replacement.
Vehicle replacement gap insurance will pay the difference between the amount you receive on your claim, and your cost of replacing the vehicle.
Return to invoice Gap insurance
This is similar to vehicle replacement Gap insurance, but this tops up the amount you received from your claim to the total price you paid for the vehicle in the first place. Some policies will also include the cost of interest.
Where can I buy Gap insurance?
Most people who have Gap insurance buy it from their vehicle provider, though the financial regulator has recently changed the rules as it was concerned people weren't getting the best deals as a result.
From 1 September 2015, car dealers aren't allowed to sell you Gap insurance on the same day as you buy the car, unless you explicitly ask them to. When you buy Gap insurance from a car dealer, they are obliged to tell you:
- Whether it's compulsory or obligatory for your purchase
- Total premium due
- Length of the policy
- That the product is available elsewhere
- Features, benefits and unusual exclusions
Where can I read more about Gap insurance?
Designed to cover any shortfall from the proceeds of a comprehensive motor policy should a vehicle, purchased on finance, be written off and the insurance payout be less than the outstanding loan on the vehicle. For example, if you borrow £18,000 and, after two years, you’ve paid the loan down to £12,000 but you write the vehicle off and the insurance company will only pay out £7,000, the GAP insurance covers the £5,000 you’d need to find to pay off the car loan.
Association of British Insurers
Established in 1985, the ABI is the trade body for UK insurance companies. It has more than 400 member companies that provide around 90% of domestic insurance services sold in the UK. The ABI speaks out on issues of common interest and acts as an advocate for high standards of customer service in the insurance industry. The ABI is funded by the subscriptions of member companies.