What Are The Requirements For Gap Insurance?
If your car is stolen or suffers a total loss, the reality is that most car insurance policies will reimburse you for its current market value, not the price you originally paid. This creates a potentially distressing financial situation when you reflect on the fact that the average new car depreciates roughly 40% of its value within a year of purchase, and approximately 60% after three years. Consequently, this depreciation rate could lead to a significant financial shortfall.
In light of this, guaranteed asset protection, or Gap insurance, emerges as an essential financial safety measure. Gap insurance serves as supplementary insurance that functions alongside your primary car insurance policy. Its role is to cover the monetary difference between what your primary insurer reimburses and the original cost of the car (also known as return to invoice or RTI gap insurance) or the expense associated with purchasing a comparable new replacement vehicle.
Most importantly, Gap insurance offers the additional benefit of clearing any outstanding car finance or lease payments. This is especially crucial for individuals who might be in a challenging financial scenario due to unforeseen incidents leading to the loss of their vehicle. Ultimately, it provides a financial cushion, preventing individuals from being seriously out of pocket.
Should You Buy Gap Insurance?
Choosing the appropriate Gap insurance policy often comes down to assessing the level of risk you’re comfortable with and determining how much you’re willing to spend to mitigate potential financial fallout. Considering auto insurance, the probability of your car being written off or stolen within a typical Gap policy span of three years may seem relatively insignificant. However, it’s essential to note the high costs associated with such incidents if they do occur.
When you’ve concluded that Gap insurance suits your needs, remember that accepting the offer from the car dealership isn’t necessarily the best choice. Car dealerships are renowned for being among the priciest sources of Gap insurance. This exorbitant cost is mainly due to customers’ lack of awareness about the insurance market, as many never take the time to compare rates and explore options outside the dealership. Therefore, it’s wise to evaluate the best UK Gap Insurance providers, to ensure you’re getting the best value for your money.
Related Reading: Why Do I Need Gap Insurance?
Choosing the Right Gap Insurance
There are certain circumstances where Gap insurance may prove beneficial, irrespective of whether you’re purchasing a new or second-hand car in the UK. These situations include:
Purchased using finance
If you’ve bought your car through finance, such as a Personal Contract Purchase (PCP) scheme, Hire Purchase (HP), or by securing a personal loan, Gap insurance can be a lifesaver. It bridges the considerable gap you might find challenging to cover if the car is written off.
Acquired a car subject to swift depreciation
Should you be buying a car expected to depreciate rapidly, obtaining Gap insurance is a sensible move. It assists in covering the difference between the insurance payout and the potentially significant expense of replacing the car.
If you have entered into an extended lease for a car that is subsequently stolen halfway through the lease term, you could be saddled with a sizeable bill for any remaining payments, as well as the cost of replacing the car. In such a situation, Gap insurance serves to protect you against this financial risk.
Related Reading: Car Lease vs Contract Hire vs HP vs PCP: What Is The Difference?
Key Considerations When Opting for Gap Insurance
There are five critical elements you should consider when looking to take out Gap cover: 1) the duration of coverage, 2) the excess, 3) any specific exclusions, 4) the process for making claims, and 5) the cancellation procedure.
If you come across a policy that is significantly less expensive than others, you should ensure that the reduced cost doesn’t come with a considerably shorter claim period. For instance, certain policies may not allow you to make a claim if your car is stolen and not recovered within a brief window, possibly as short as 30 days.
You should also be aware of a provision known as ‘pre-approval’. This clause prevents you from accepting an offer from the car’s primary insurer without the Gap insurer’s approval. This could be employed by the Gap insurance company to delay its payout to you by continually rejecting the main insurer’s offers.
What Should I Expect to Pay for Gap Insurance?
The expense of a Gap insurance policy should correlate with the amount insured and the associated risk level should a claim be filed. This is a supplementary product that works alongside your existing motor insurance, kicking in if your vehicle is deemed a total loss. We issue many thousands of policies annually, and due to our substantial purchasing power, we can provide them at highly competitive prices. And, as we don’t operate on a commission basis, we’re able to pass any savings directly onto our customers.
How Does Negative Equity Impact Gap Insurance?
In simple terms, you’re in a state of negative equity when your outstanding debt to a leasing or car finance provider exceeds the current value of your car.
This situation is quite prevalent in car finance deals due to the factor of depreciation. Most of the time while you’re servicing the loan, you’ll owe more than the car’s current value because the vehicle’s worth depreciates at a rate faster than the loan repayment.
For instance, if you secure car finance for £15,000, you might still owe approximately £13,500 after six months, but due to depreciation, the car’s worth might have reduced to £12,000. This leaves you in a negative equity situation of £1,500. See our article on Negative Equity On Car Finance Explained: Impacts & Solutions.
However, if you retain the car throughout the entire finance deal and it isn’t written off or stolen, being in negative equity won’t pose a problem. Over time, your repayments will align with the value of your car as depreciation slows down, and by the end of your finance term, everything should balance out.
But what happens if your car is written off during the finance agreement? Your car insurer will cover the car’s current market value, but this sum is likely to be less than what you still owe to the finance provider.
Related Reading: Negative Equity On Car Finance Explained: Impacts & Solutions
How Much Should I Spend on Gap Insurance?
Gap insurance is a sensible safeguard, especially considering the fast depreciation in value of cars. Whether your vehicle was purchased outright or on a finance deal, the average new car’s worth can decrease by 40% within its first year.
Most car insurance policies will only compensate you for the car’s current market value at the time of an incident or theft. On the other hand, Gap insurance covers the ‘gap’ between the car’s present market value and the amount you paid for it (or the cost of a replacement car), while also taking care of any residual finance or leasing payments.
If you’ve purchased a new car from a dealership, you’ve likely already been introduced to Gap insurance. Given the peace of mind it affords, it may seem tempting to add one of these policies to your car finance or lease agreement in the showroom itself.
Nonetheless, it’s crucial to ensure you’re getting value for money. Dealerships tend to charge a premium for Gap insurance, and better deals can often be found online, making it worth exploring alternative options.
Looking for the best Gap Insurance Providers in the UK?
Visit MoneySavingExpert’s Gap Insurance page for an impartial view. We are ranked No.1
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.