GAP insurance

If your car is stolen or written off, there can be a big difference between the amount your car insurance provider will pay out and the price you originally paid for it.  
GAP insurance can cover this difference. But do you need it?

If your car is stolen or written off, there can be a big difference between the amount your car insurance provider will pay out and the price you originally paid for it.  
GAP insurance can cover this difference. But do you need it?

Daniel Hutson
From the Motor team
minute read
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Posted 9 FEBRUARY 2021

What is GAP insurance?

GAP insurance, officially known as Guaranteed Asset Protection, covers the difference, or “shortfall”, between the current market value of your car and the price you originally paid for it.

When you buy a new car, its value will begin to depreciate as soon as you drive it out of the dealership.

Brand new cars lose their value very quickly. On average, around half the original price will be lost over the course of three years - although it partly depends on the make and the amount you use the car.

If your car is written off, your insurance provider may only pay out the current market value, not the original purchase price. In the event of a total write off, if your car is more than 12 months old, you could find yourself out of pocket. This is known as a shortfall.

GAP insurance is add-on cover that can be bought in addition to your main car insurance policy. It could give you the peace of mind that, if the worst should happen to your car, its purchase value is covered.

Types of GAP insurance

There are three main types of GAP insurance policy:

  • Finance GAP insurance – if you’ve taken out finance to buy your car on a contract hire basis, this will cover the amount you still owe the finance company, if your car was to be written off. This means you shouldn’t need to continue making your monthly repayments on your outstanding finance agreement. This is the most standard and common type of GAP insurance.
  • Return-to-invoice GAP insurance – this covers the difference between your car insurance pay-out and the exact invoice price you paid for your car. It can be used for both new and second-hand cars. This type of GAP cover can be especially useful for cars that fluctuate in value, offering you a better sense of security, knowing that you’ll be covered for what you paid.
  • Return to value GAP insurance – this is a bit like the return-to-invoice insurance above. However, instead of paying out what you paid for the car up front, it tops up the difference between the write-off settlement from your car insurer and how much it was worth when you bought it.
  • Vehicle Replacement GAP insurance – covers the new price of the exact model and specification of your car, even if the price has gone up. This can be very useful if you’re a good haggler and managed to negotiate a discount with a dealer at the time you originally bought the car. This type of GAP insurance is only available for a new vehicle though.
  • Negative Equity GAP Insurance – this type of cover will also protect you against you being in ‘negative equity’, which is when the value of your car falls, leaving it worth less than the loan amount you’ve taken out on the car. This is useful if you’re part-exchanging the car when upgrading to a more expensive model, with this GAP insurance covering what would have been lost.
  • Lease GAP Insurance – if you’ve leased your car, or got it on a contract hire purchase, this will cover you not just for the remaining repayments you’d still need to pay after writing the car off, but it’ll also cover you for any of the extra costs that were part of your contract agreement. For example, most agreements will include early repayment charges, which can be very expensive, just like on a mortgage. With lease GAP insurance, you won’t need to worry about it.

Why get GAP insurance?

While GAP insurance isn’t a legal requirement like regular car insurance, there are a few reasons you should consider it when choosing between insurers.

First, cars quickly lose their value. As we mentioned earlier, brand new cars devalue really quickly. The average car loses about half its value in the first three years. This varies depending on the make and model you’ve bought, but it’s still shocking. GAP insurance can protect you against the loss against its original value.

GAP insurance is also useful if you’ve bought your car on a finance agreement. If you do that and then write it off, you’ll still be responsible for making the rest of your monthly repayments on your outstanding finance. If you were forced to continue paying for months or even years for a car you don’t own anymore, that would be extra rough, so GAP insurance can cover you.

Do you need GAP insurance?

Before you buy GAP insurance, you should decide if it’s worth it.

GAP insurance might be useful if:

  • You took out a large finance loan to buy your car and you owe more than it’s worth. This is known as being in “negative equity”.
  • The type of car you bought depreciates very quickly.
  • Your car is hired on a long-term lease. If your car is written off, you may end up owing more to the lease hire company than your insurance provider is prepared to pay in settlement.
  • Your car is only a couple of years old, but you want a brand-new replacement in the event of a total loss.

GAP insurance might not be worth it if:

  • Your car is less than a year old. Many car insurance providers offer a new car replacement, if your car is written off within 12 months of the date it was first registered. Check the terms and conditions carefully to make sure your policy offers this benefit.
  • You’d be happy with a like-for-like replacement for the car you had at the time it was written off - you don’t mind that the replacement car isn’t brand-new.
  • You have a second-hand car. Most used cars have a slower rate of depreciation than brand-new cars. If the difference in purchase price and the price your insurance provider will pay out is reasonably small, GAP insurance may not be worth it.

Are GAP insurance policies just for new cars? 

GAP insurance is arguably most useful as an addition to new car insurance policies, because new cars tend to depreciate in value much sooner than used cars. Therefore, GAP insurance is designed to cover you against that depreciation.

However, you can still get GAP insurance for used cars. Just keep in mind that the benefits are potentially far less significant, depending on the age of the vehicle, which may make the extra cover less worthwhile.

What else to consider before buying GAP insurance

Be aware that you can only usually get GAP insurance if your main car insurance policy is fully comprehensive.

You’ll only receive a GAP insurance pay out if your car is declared a total write-off or is unrecoverable. 'Unrecoverable’ is used to describe a vehicle that cannot be recovered or has been stolen.

Like any other type of insurance, always make sure you read the policy terms and conditions before buying GAP insurance.

What is not covered by gap insurance?

Typical exclusions (things that are not covered by Gap insurance) include:

  • Any amount deducted by your insurance provider. For example, as a result of unpaid premiums
  • Non-standard modifications  you added after you bought the car
  • Warranty charges
  • Insurance premium costs
  • Fuel
  • Road tax
  • Car insurance excesses over £250

How much does GAP insurance cost?

The cost of GAP insurance can vary significantly. This is because it tends to be bought in combination with new cars, which are among the most expensive. However, the make and model can make a big difference, with GAP insurance particularly useful for more expensive cars, where the quick depreciation can hurt their long-term value the most.

However, there are some things you can do to help get cheaper GAP insurance:

  • Consider the type of GAP insurance you’re buying – there are three main types of GAP insurance, with each offering different benefits. If you’re looking for cheaper insurance, a vehicle replacement GAP insurance policy may not be the best option, as it will cover the price of a brand-new version of your model, even if the market price has risen. However, a return-to-invoice policy will only cover the difference between your standard insurance payout and the price you paid for the car. This type of cover may help you get a cheaper deal, but it’s important to consider all your options.
  • Excess – like with most insurance policies, if you’re willing to increase the excess amount on your policy, you’ll normally find you can get a cheaper deal. Just make sure that you’re fully comfortable with the amount, if you need to make a claim later.
  • Don’t buy direct from the car dealer straight away – most new car dealers will follow up shortly after the sale and attempt to sell you GAP insurance cover. You’re far more likely to find a better deal than the one on offer there, and you’re under no obligation to buy with them. For the best deal, your best option is to compare quotes and buy from an online provider.
  • Negotiate – if you’ve found a better quote online, you can always use that to negotiate with your car seller for a better deal. It’s worth a try and may get you a better deal.

Compare car insurance

Financial Conduct Authority (FCA) rules, introduced in September 2015, prohibit car dealers from selling you gap insurance during the sale of the car. This is to allow you time to consider your options, compare insurance with different providers and avoid rushing into a deal you’re uncomfortable with.

You can’t currently get a GAP insurance quote with Compare the Market. But if you’re looking to shop around for fully comprehensive car insurance, compare quotes with us to find a deal that suits you.

Get a quote today and see if you could start saving.

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