What is Gap?
Guaranteed Asset Protection (GAP) insurance is a policy that covers the difference between the initial price you paid for your car and the amount that would be paid out by an insurer if your vehicle was stolen or written off
Gap insurance exists because there is often a “gap” between the amount an insurer will pay out in the event of a claim and the amount you paid for your car initially. Gap insurance is often associated with new cars because they lose value quicker than second hand cars.
But Gap insurance isn’t only the domain of the brand-new car owners - you can buy gap insurance until a car is seven years old, after which time, the vehicle is considered older and therefore not suitable for this type of cover.
Types of Gap Insurance
There are four main types of gap insurance which may seem like quite a lot but it’s worth finding out about the different types of cover as this will help you decide whether or not gap insurance is right for you
Back to invoice: This will pay out the difference between the amount you paid when you bought the car and the maximum payout the insurance company make in the event of a claim.
Return to value: This will pay the difference between the insurance company’s maximum payment and the value of your car when it was new. It is mainly aimed at people who bought their car second hand.
Vehicle replacement: This cover pays the difference between the payment your insurer will pay for total loss of your car and the cost of replacing it with a new vehicle, of the same specification.
Contract hire gap: If you drive a car which is being leased or on a contract hire basis, this cover will pay the difference between your insurers write off settlement and what is needed to repay the lender or leasing company to end the agreement. It protects you from a potential monetary shortfall between the insurance pay out and the leasing agreement
Essentially gap insurance is an extra insurance policy to cover you financially should you write off your brand-spanking new vehicle within the first few years of owning it. It gives you the peace of mind that should an accident happen, and your car is deemed a write off, you won’t be financially out of pocket.
Cars, whether they be new or second hand, are an expensive commodity and they also lose their value very quickly – in fact, it is said that a brand new car will lose between 50 and 60% of its value in three years – therefore gap insurance is a great financial defence against losing the financial outlay between what you paid and what your car insurance company will pay out should you claim.
So, if you are splashing out on a second hand sedan, or financing a new four-wheeled drive, consider taking out gap insurance to fill that financial gap should you find yourself out of pocket after an accident.