What is GAP Insurance and do I Need It

The question ‘What is GAP insurance’ is often asked by a customer purchasing a new car at a dealership. It’s one of the many extras that a salesperson will assure you that it’s essential to take.

More on that a bit later and back to the original question. GAP insurance definition ‘Guaranteed Asset Protection’ is quite simply a bridge to fill the gap between what your car insurance company pays out in the event of an accident and what you actually paid for the car.

This applies only to where the vehicle has been totally written off, or that it is unrecoverable due to being stolen for example. GAP insurance may come also under various other names such as Value Guard for instance. It’s essentially all the same thing however.

Let’s look at an example. Say you purchase a new car for £20,000. 14 or so months down the line the car is stolen and not recovered, or it’s written off. Your insurance company will offer you somewhere between the book price value of your car and the retail value.

However, due to a cars depreciation rate of around 40% within the first year alone, the insurance company is willing to offer you £12,000 for your car which is merely 14 months old. That 40% depreciation equates to a massive £8,000 loss.

The red ‘GAP Payout’ indicates the amount GAP insurance pays out on top of your car insurance

So GAP insurance is an extension of your current comprehensive car insurance (not a replacement) that in the example above pays the £8,000 loss between book / retail price and purchase price. That’s all very exciting, but you’re probably asking do I need GAP insurance and is it worth it?

Do I need GAP insurance and is it worth it

Legally to drive a car on a public road you must be insured by either:

This is to protect the ‘third party’ or the person/s and their property in the event of an accident that’s your fault. GAP insurance helps to protect only the vehicle owner against financial loss and so it isn’t a legal requirement.

When not to buy GAP insurance as it may not be worth it

GAP insurance only pays out if your car is insured fully comprehensive, so there’s little point in taking out or renewing GAP insurance if you are covered by third party or third party fire and theft.
Upon buying a new car, most insurance providers offer a new car replacement in the event of a write-off or unrecoverable within the first 12 months if you are the first registered owner.
GAP insurance isn’t cost effective due to the vehicle retaining its value. Pre-owned vehicles of three years or more in age will depreciate less than a new vehicle.

Why GAP insurance may be worth buying

Upon purchasing a new car, it depreciates in value significantly and quickly.
If you have taken out finance or a loan on a new car, if your deposit was small you may end up owing more than what you are offered from the insurance company in the event of a claim, typically due to a depreciation in value.
If in the event of a total loss claim you cannot afford to replace the vehicle for a like-for-like model due to depreciation.

Types of GAP insurance

Though all types of GAP insurance primarily serve the same purpose; to not leave you out-of-pocket, there are various types of GAP insurance, one of which will likely benefit you more due to specific circumstances. The types of GAP insurance available are:

Finance GAP insurance – the shortfall between your car insurance pay out and the total amount owed on the finance agreement is the ‘GAP’. GAP payments are made directly to the finance company to clear monies owed.
Return to invoice GAP insurance – if after the car insurance pay out does not meet the amount the consumer paid as stated on invoice, this shortfall in monies is paid directly to the consumer.
New car GAP insurance – the payment is made to the consumer, based on the price of a new vehicle (of the same model and specification) at the time of the claim minus the amount the motor insurer has paid out.

Is GAP insurance worth it on used cars

The fact of whether it’s a new or used car is irrelevant. What is relevant is how much the cars value depreciates during the time you have it. Again it all comes down to numbers. GAP insurance is often most beneficial to those taking out finance on a used car. If you take out a loan for £8,000 to pay for a second hand car and put 0% deposit down, you will ultimately be paying the highest interest back in the long term, especially if your interest rate is already high on the loan.

Ultimately you may own over £10,000 total for the loan with interest and with the depreciation of your vehicle, you may need to pay £10,000 with your insurance company willing only to pay £6,000 book price for your car. Clearly in this situation GAP insurance is worth it. Finance GAP insurance will be of huge benefit to you here, in particular due to the negative equity.

Regardless of whether the vehicle you intend on purchasing is new or used, always research the vehicles value one, two or three years ahead to see if GAP insurance is worth it. This is especially important if taking out a loan.

What does GAP insurance cover

We know that GAP insurance primary purpose is to cover the shortfall between car insurance pay out and what you paid or owe on a car. So rather than discuss what GAP insurance covers, let’s discuss what doesn’t GAP insurance cover to get a clearer idea.

After submitting a claim to your car insurance provider, all information is dealt with by the claims adjuster. After establishing who was at fault (contributory negligence) and if any laws were broken, you will receive an offer that may include deduction based on these circumstances. GAP insurance will not cover any deductions made by your insurance provider.
Check that your GAP insurance policy will cover any excess. GAP insurance policies will generally not cover any excess over £250. See car insurance excess for further information.
Any extras that you added to your car after initial purchase will not be covered. These may include expensive stereo or wheels etc.
If your car insurance provider offer you a new vehicle replacement and you refuse, you may be refused payment from your GAP insurance provider.

Where to buy GAP insurance

In many cases you may first become aware of GAP insurance whilst purchasing a new car from a dealership, or you may be looking to source your own gap insurance via the internet, typically through price comparison sites. But are there any disadvantages or advantages depending on where it’s purchased?

As we mentioned at the start of the article, car sales people will make you believe that their added extra ‘GAP insurance’ is essential and life wouldn’t be worth living without it. Most car dealerships and salespeople don’t make as much profit or commission on the sale of a car alone as most of us think. Popular misconception makes us believe they make thousands on each sale. Other than the odd exception, the contrary applies and where their commission is really obtained is through the added extras they try to sell you.

One of these being GAP insurance or Value Guard or whatever they choose to call it. You’ll usually be greeted by a price of anywhere between £400 to £500 for three years’ worth of GAP insurance coverage from a sales person. Essentially they acquire this insurance from the same companies that any one of us can get it from and simply add on their commission. You could likely acquire the same three years cover for around £200, saving yourself a small fortune.

Where car dealerships often draw new car buyers into the sale are those that have no previous knowledge of GAP insurance. You may even hear the sales person telling you that it isn’t possible to obtain GAP insurance anywhere except a dealership. This may in fact be true if they choose to call it by their own unique made-up name. All comes down to the same thing though – GAP insurance which can be purchased by anyone.

So it could be considered a bit of a rip off when taking out GAP insurance from a car dealership. If however you like the idea of purchasing the insurance cover, you may find the ease of letting the dealership sorting it all out worth the premium price. You may also find that you can absorb the cost of GAP insurance into the car finance being applied for, which for some, can prove beneficial.

Along with the hugely inflated costs of buying GAP insurance from a dealership, a potential issue should it arise is that in the event of a GAP insurance pay out, the insurance provider may have an agreement with the dealership that the monies received can only be used in credit form at the same dealership you purchased the original vehicle from. An issue for some, perhaps not for others, but one worth discussing and reading the small print before proceeding.

When should you buy GAP insurance

There’s no particular time that is appropriate for buying GAP insurance. It really depends on your circumstances and what the GAP insurance provider offer. If you have come to the conclusion that GAP insurance is of benefit to you, be in a new or used car, or paying by finance or by cash, it is then down to the limitation of the provider. Some GAP insurance providers offer cover only on brand new cars, whilst other offer GAP insurance on used cars up to 10 years of age.

Policies run from anywhere between one to five years, so choosing the appropriate length of your policy based on the amount of time you will have the vehicle and it’s depreciation value is important. Most cars will typically halve in value over a period of three years under normal use.

Mis-sold Gap insurance

Many of us of heard about the mis-selling of Payment Protection Insurance (PPI), mostly thanks to the publicity around it. GAP insurance is another one of those added extras that can easily be mis-sold. Like PPI, GAP insurance is an extra that when sold to a consumer makes for a very nice commission payment for sales people. It’s these added extras that make up the bulk of a sales persons salary, often earning them more than a sale of the product itself. So it’s no surprise that a certain level of mis-selling goes on.

The first steps into avoiding being mis-sold, is to fully understand what GAP insurance is as explained on this page, and whether you actually need it. A sales person will of course try to assure you that it’s essential. As with PPI however, you may be entitled to a full refund of your GAP insurance if mis-sold. GAP insurance can be an excellent added extra to purchase, but it is of course only any good if you need it. Here are some examples where you may be eligible to a refund of mis-sold GAP insurance:

Whilst making a finance agreement for your new car, the sales person did not inform you of GAP insurance and packaged it as part of the agreement.
The sales person insists that GAP insurance is compulsory for taking the finance.
They provide misleading information such as it’s not possible to take out GAP insurance anywhere except a dealership. Other forms of misleading may be to ‘dress it up’ with alternative name titles and to exaggerate what it can do for you.
GAP insurance must be fully explained to a consumer, what it is, it’s features and costs.
The sales person sold you the product even though you didn’t need it. For example, your standard car insurance covers all the cost of the vehicle or it may provide and exact model replacement in the event of an accident. Other examples may apply such as the consumer having adequate funds saved to cover the difference between an insurance settlement and the value of the vehicle, therefore not requiring GAP insurance.

This is not an exhaustive list and simply provides some examples. If for whatever reason you believe you have been mis-sold GAP insurance, your first step is to contact the company that sold you the policy.

Write to the manager of the company or branch fully explaining why you believe GAP insurance was mis-sold to you and that you wish for a full refund. Include in the letter reference numbers and date along with the persons details who sold it to you. Include as much information as possible such as what the sales person said that you believe was misleading (or lack of what they said if applicable). Explain in the letter that they have a certain time-frame to respond, usually 14 days and send the letter via recorded delivery to ensure it reaches its destination.

The company may reply rejecting your claim for a refund along with their explanation of events. If at this point you are still unhappy, write once again, this time to senior management, at their head office (if applicable). Send a copy of the original letter you sent, the letter you received and an explanation of why you believe their response is unreasonable. If at this point you are certain you were mis-sold GAP insurance, explain that your next course of action will involve the Financial Ombudsman.

If indeed you believe their response is unsatisfactory, the Financial Ombudsman can be your next course of action. The Financial Ombudsman website will help to explain the appropriate course of action necessary to go forward. The small claims court is also a potential route forward although legal advice is recommended before proceeding.