Don’t Get Caught Short: Understanding Shortfall Insurance

What Is Shortfall Insurance?

Shortfall insurance, also known as Gap insurance (Guaranteed Asset Protection insurance), in the UK is a type of insurance coverage that comes into play when there is a ‘gap’ or ‘shortfall’ between the actual cash value of a vehicle and the amount still owed on its financing or lease agreement. This insurance is particularly relevant in cases where a vehicle is stolen or written off (declared a total loss) and the pay out from the standard car insurance doesn’t cover the outstanding loan or lease amount.

For instance, if you purchase a new car and it gets stolen or is damaged beyond repair, the insurance pay out might be less than the amount you still owe on your car loan due to depreciation.

Shortfall insurance covers this gap, ensuring that you’re not left paying for a vehicle you no longer have.

How Is Shortfall (or Gap) Insurance Different From Other Types of Insurance?

Shortfall (Gap) insurance is distinct from other types of insurance due to its specific purpose and coverage scope. Here’s how it differs:

1. Purpose and Coverage Focus: GAP insurance is designed specifically to cover the ‘gap’ between the insurance pay out (based on the current market value of the vehicle) and the amount you originally paid for the vehicle or the amount still owed on your finance or lease agreement. In contrast, standard car insurance policies, such as comprehensive, third-party, fire and theft, or third-party only, provide coverage for different types of risk like damage to your vehicle, liability for damage to other vehicles, theft, and fire.
2. Complementary Nature: GAP insurance is not a standalone policy; it is intended to supplement comprehensive car insurance. It kicks in only when there’s a total loss claim (i.e., when the car is stolen or written off) and the pay out from the comprehensive insurance doesn’t cover the full amount owed on the vehicle or its original purchase price.
3. Depreciation Factor: The primary factor that makes GAP insurance necessary is the depreciation of the vehicle. Cars lose value over time, often quite significantly in the first few years. If a car is written off or stolen, a standard car insurance policy will pay out only the current market value of the car, which could be much less than its purchase price or the outstanding finance amount. GAP insurance covers this depreciation loss.
4. Specific to Vehicle Finance and Ownership: GAP insurance is particularly relevant for those who have taken out finance to purchase a vehicle or are leasing a vehicle. It’s less pertinent for car owners who have paid in full or whose vehicles have significantly depreciated in value.
5. Optional Coverage: Unlike some forms of car insurance, which are legally required (like third-party insurance), GAP insurance is optional. Vehicle owners can choose whether or not to purchase it based on their assessment of the financial risks associated with the potential ‘gap’ due to depreciation.

In summary, GAP insurance is a specialised product that addresses a specific financial risk associated with vehicle depreciation and the gap between the insurance pay out and the vehicle’s purchase price or finance amount, complementing but not replacing standard car insurance policies.

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Related Reading: Worried About Depreciation? Get Gap Insurance

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What Types of Shortfall (or Gap) Insurance Are There?

In the UK, there are several types of Shortfall or Gap Insurance, each designed to cover different scenarios related to the value and financing of a vehicle. Here’s a breakdown of the most common types:

1. Return to Invoice (RTI) Gap Insurance: This is one of the most common types. It pays the difference between the insurance pay out (the vehicle’s market value at the time of the claim) and the original purchase price of the car. This type is particularly useful if you’ve bought a brand-new car, as it can depreciate quickly.
2. Vehicle Replacement Insurance (VRI) Gap Insurance: Similar to RTI, but instead of covering the gap between the insurance pay out and the original purchase price, it covers the difference between the insurance pay out and the cost of replacing the vehicle with a new one of the same make, model, and specification (which might be higher than the original price due to inflation or model upgrades).
3. Finance Gap Insurance: This type is specifically for vehicles bought on finance. If your car is written off or stolen, this insurance covers the gap between the insurance pay out and the remaining balance on your finance agreement. It’s essential if you don’t want to end up paying for a car you no longer have.
4. Lease Gap Insurance: Similar to finance gap insurance, but specifically for leased vehicles. It covers the gap between the insurance pay out and the amount you still owe on your lease.
5. Contract Hire Gap Insurance: This is a form of lease gap insurance tailored for people with contract hire agreements. It covers the difference between the insurance pay out and the amount required to settle the contract hire agreement.
6. Return to Value Gap Insurance: This covers the difference between the insurance pay out and the market value of the vehicle at the time you took out the policy, which can be useful if you bought the car second-hand.

It’s important to note that Gap Insurance is optional, and its suitability depends on individual circumstances like the type of vehicle, how it’s financed, and the level of risk you’re willing to accept. Always read the policy terms carefully to understand what is covered and any exclusions or limitations.

Do You Need Shortfall (or Gap) Insurance?

Whether you need Shortfall insurance (or GAP insurance) in the UK largely depends on your personal circumstances and the level of financial risk you are comfortable with. If you have purchased a new or relatively new vehicle, especially on finance or a lease, this insurance can be a prudent choice.

New cars typically depreciate quickly, often losing up to 60% of their value within the first three years. In the event of a total loss or theft, your standard car insurance will only pay out the current market value of the vehicle, which could be significantly less than what you originally paid or still owe on a finance agreement. This situation leaves a financial ‘gap’ that you would need to cover out of pocket, and GAP insurance is designed to cover this shortfall.

However, it’s not essential for everyone. If your car is older or has already depreciated significantly, the gap between the insurance pay out and the outstanding finance or the original purchase price may not be substantial. In such cases, the cost of GAP insurance might outweigh the potential benefits.

Additionally, if you could afford to cover the difference between the insurance pay out and what you owe on the vehicle, or if your car loan is structured in a way that you’re not at risk of being ‘upside down’ (owing more than the car’s worth), GAP insurance may be unnecessary.

It’s also important to check your existing car insurance policy, as some comprehensive policies might already offer new car replacement in the first year, reducing the need for GAP insurance.

Ultimately, assessing your financial situation, the terms of your car finance, and your risk tolerance is crucial in deciding if GAP insurance is necessary for you.

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Related Reading: Don’t Get Left in the Gap: Essential Questions Before Buying Gap Insurance

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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?

Combined Return to Invoice Gap Insurance

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.

Lease/Contract Hire Gap Insurance

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.

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Related Reading: The Consequences of NOT Having Click4Gap Gap Insurance