Gap Insurance: A Must-Have for Leased Cars?
What Is Gap Insurance?
Gap insurance, or Guaranteed Asset Protection insurance, is a type of car insurance that covers the difference between the actual cash value of a vehicle and the balance still owed on the financing (loan or lease) in the event of a total loss. This type of insurance is particularly important because cars typically depreciate rapidly in value.
When a car is written off or stolen, standard car insurance policies only pay out the current market value of the vehicle, which can be significantly less than what the owner still owes on their car loan or lease agreement. This leaves a “gap” between the insurance pay out and the remaining debt, which can be a significant financial burden.
Gap insurance is designed to cover this shortfall, ensuring that you’re not out of pocket if your car is lost or destroyed. It’s especially useful for new car buyers, as new vehicles lose their value the fastest.
Not all gap insurance policies are the same, though; there are different types, including Return to Invoice (RTI), which pays the difference between the insurance pay out and the original purchase price, and Vehicle Replacement Insurance (VRI), which pays the cost of replacing the car with a new one of the same make, model, and specification.
It’s important to note that gap insurance is optional and an additional cost compared to regular car insurance.
How Does Gap Insurance for Leased Vehicles Work?
Gap insurance for leased vehicles functions as a financial safety net, covering the difference between the insurance pay out and the remaining amount owed under the lease agreement in the event the vehicle is written off or stolen. Here’s how it works:
- Lease Agreement and Depreciation: When you lease a vehicle, you agree to make regular payments for its use over a set period. However, vehicles depreciate quickly, meaning their value decreases over time. This depreciation can result in a situation where the amount you owe on the lease is more than the car’s current market value.
- Total Loss Scenario: If the leased car is declared a total loss due to an accident, theft, or other covered events, your standard car insurance policy will typically pay out the current market value of the vehicle. However, this amount may be less than what you still owe on the lease.
- Gap Insurance Coverage: This is where gap insurance becomes crucial. It covers the difference between the insurance pay out (the car’s current market value) and the outstanding balance on your lease agreement. For example, if your car is written off and your car insurance pays out £15,000, but you owe £20,000 on your lease, gap insurance would cover the £5,000 shortfall.
- Types of Gap Insurance: There are different types of gap insurance tailored to leased vehicles, such as:
- Finance Gap Insurance: Pays the difference between the insurance pay out and what you still owe on the lease.
- Return to Invoice (RTI) Gap Insurance: Covers the difference between the insurance pay out and the original invoice price of the car, which can be beneficial if the car’s value has depreciated significantly.
- Limitations and Exclusions: It’s important to read the policy terms carefully. Gap insurance may have limitations on the claim amount and exclusions, such as not covering extras like extended warranties or insurance premiums added to the lease.
- Policy Duration: Gap insurance is typically taken out for a specific term that aligns with the lease period, ensuring coverage is in place for the duration of your financial commitment.
In summary, gap insurance for leased vehicles acts as a layer of protection against the financial risk associated with the rapid depreciation of cars. It ensures that in the event of a total loss, you’re not left paying the difference between the insurance settlement and the amount you owe on your lease agreement.
Related Reading: The Benefits Of Car Leasing In The UK: Finding The Perfect Car Lease
Is Gap Insurance Legally Required for Leased Cars?
In the UK, gap insurance is not legally mandatory for leased cars but is often highly recommended. Many lease agreements may require gap insurance as part of the leasing contract, but this is a stipulation set by the leasing company, not a legal requirement.
When you lease a car, you are typically responsible for the vehicle’s insurance coverage. Standard car insurance will only cover up to the car’s current market value in the event of a total loss, not the amount you owe on your lease agreement. This can leave a significant financial gap, especially since leased vehicles often depreciate faster than the reduction in the lease payoff amount.
How to Choose the Right Gap Insurance Policy for Your Leased Car
Choosing the right gap insurance for your leased car involves several key considerations to ensure that you get the most appropriate coverage for your needs. Here’s a guide to help you make an informed decision:
- Understand Different Types of Gap Insurance:
- Finance Gap Insurance: Covers the difference between the insurance pay out and the outstanding finance on the lease.
- Return to Invoice (RTI) Gap Insurance: Pays the difference between the insurance pay out and the original invoice price of the car.
- Vehicle Replacement Insurance (VRI): Covers the cost of replacing the car with a new one of the same make, model, and specification.
- Lease Gap Insurance: Specifically designed for leased vehicles, covering the difference between the insurance pay out and the amount you need to settle your lease agreement.
- Assess Your Vehicle’s Depreciation Rate:
- Consider how quickly your car might depreciate. Cars that lose value faster may benefit more from gap insurance.
- Research the expected depreciation curve for your car model.
- Evaluate Your Financial Risk:
- Consider your financial situation and the potential risk you face if your car is written off.
- Calculate the potential ‘gap’ at different points in your lease term.
- Check Lease Agreement Requirements:
- Some leasing companies require specific types of gap insurance.
- Ensure you comply with your lease agreement.
- Review your lease contract for any clauses related to gap insurance.
- Compare Policy Terms and Coverage:
- Not all gap insurance policies are the same. Compare what is covered and what is excluded.
- Look for limits on the claim amount or specific conditions under which the policy is valid.
- Consider Policy Duration and Cost:
- Match the policy term with the length of your car lease.
- Compare premiums from different providers to find a cost-effective option.
- Read Reviews and Check Insurer Reputation:
- Research customer reviews and the reputation of the insurance provider.
- Consider the insurer’s history with claim settlements.
- Understand the Claims Process:
- Familiarise yourself with the claims process. It should be straightforward and clear.
- Know the required documentation and time frames for filing a claim.
- Seek Professional Advice:
- If unsure, seek advice from a financial advisor or insurance specialist.
- They can provide personalised recommendations based on your specific circumstances.
- Stay Informed and Review Periodically:
- Stay informed about changes in the market value of your car and any changes in your financial situation.
- Reassess your need for gap insurance periodically, especially if your circumstances change.
By carefully considering these factors, you can choose the right gap insurance for your leased car, ensuring that you’re adequately protected against financial losses in case of a total loss situation.
Related Reading: A Comprehensive Guide To Gap Insurance
Need Gap Insurance?
There are a few different types of policy you can choose from when taking out your Gap Insurance cover with Click4Gap. These depend largely on how you intend to fund the purchase of your vehicle. So what car Gap Insurance is right for you?
If you paid cash for your vehicle, or paid a sizeable deposit, or if you financed it, Combined RTI Gap cover will pay out the shortfall between the cost of your vehicle and the market value at the point of claim, which is the amount your motor insurer will cover. This is cover that will protect you no matter if you use your vehicle for private use or for business.
If you leased your vehicle or it is under a contract hire agreement, Lease/Contract Hire Gap Insurance will cover you for the shortfall on your lease agreement, after your motor insurer settlement. If, for any reason, you change your vehicle within the first 90 days from the start date, we will also arrange to transfer your cover to your new vehicle without hassle or charge.
Related Reading: The Consequences of NOT Having Click4Gap Gap Insurance