Car Gap Insurance

When you are in the market for a new car on finance you will almost inevitably be offered certain financial add-on products, one of the most common being GAP insurance which covers you in the event of an insurance write off. Can you afford not to invest in GAP insurance? For an independent assessment read on….

rusty old carIf you have bought a new car recently the chances are that you will have been offered GAP Insurance (Guaranteed Asset Protection). And it’s probably equally likely that you were caught on the hop and asked to make a decision on the spot. And let me guess; you hadn’t budgeted for this insurance but you find the prospect of not being fully insured, worrisome.

Well, don’t beat yourself up, you are by no means alone. The Financial Conduct Authority (FCA) have recognised this dilemma and a retailer can no longer initiate a sale of GAP insurance until four days have elapsed following the sale of a car. This, it is hoped, will allow time enough for you to look into the options dispassionately and come to a rational decision.

This article is designed to help you so let’s start with an explanation of GAP insurance. Essentially, when you finance or lease a car, for a period of time, typically a year or two, there will be a financial gap between the outstanding finance on the vehicle and the insurance valuation, so in theory, if your car is stolen or written off, you could be left out of pocket, despite having fully comprehensive insurance. GAP insurance covers your vehicle in this situation. You can only claim on a GAP insurance policy if your car is officially written off; whether beyond repair or stolen and deemed unrecoverable.

Let’s consider a simple example. You purchased a car for £20,000 on four-year finance and after a year the car is stolen and written off in an accident. Your insurance policy pays out £11,600 on their valuation of the car but your outstanding finance is £16,400 and without GAP insurance you would be in debt to the tune of £4,800 and faced with the prospect of financing a new car.

If you are in two minds about whether to invest in a policy, perhaps the first thing you should think about is the extent of the risk. How likely is it that your car will be written-off? Insurance companies wanting to sell GAP insurance will give you the scary facts; over 500,000 cars are written-off in the UK each year. It seems a lot doesn’t it? But if you consider there are 35 million cars on the road, suddenly the risk starts to look a lot smaller. In fact, probability suggests you are likely to have one write-off per lifetime. So if you have been fretting about not buying GAP insurance, fret no longer!

I am not saying GAP insurance doesn’t have a place in the market but in reality it’s an insurance that, for three reasons, most people can live without.

  1. The probability of you having to make a claim are small (as illustrated in the paragraph above, on average once in a lifetime.)
  2. The insurance claims ratio is very low, at only around 10% which means insurance companies are paying out in claims, only 10% of what they are receiving in premiums. In basic terms this means the consumer is not getting a good deal or in other words, premiums are usually too high.
  3. And lastly, even in the eventuality of your car being written off, the chances are your comprehensive insurance will cover the bulk of your claim and in most cases the resulting loss could be absorbed by either buying a cheaper car or negotiating a difference finance package.

There are three main GAP insurance products:

  1. Finance GAP insurance. At its most basic level GAP insurance will cover outstanding finance and leave you without a debt. If you look at table one below, which shows an example of how GAP insurance may pay out on a typical four-year PCP you will see the value of this insurance is minimal. After two years your payments have ‘caught’ up with depreciation and therefore there would be no claim on the GAP policy. This form of GAP insurance should cost very little.
  2. Return-to-invoice insurance. These policies have far more value but will of course be more expensive. In the case of a successful claim, a return to invoice policy will pay out a figure equalling the original invoiced cost of the car. In the example shown in table 2 below the pay-out in year four would be a healthy £12,200 which will be in addition to £7,800 paid under your comprehensive car insurance policy.
  3. Vehicle replacement insurance. These policies are very similar to return to invoice policies but pay out that little bit more to allow for inflation so even in the worst case scenario you could replace your original car with the up to date equivalent model.

Table one: example of Finance GAP Insurance based on typical four-year PCP on vehicle costing £20,000.

Term Car depreciating value Outstanding finance GAP potential Claim Car insurance potential claim
Year one £11,600 £16,400 £ 4,800 £11,600
Year two £10,200 £12,600 £ 2,400 £10,200
Year three £9,000 £8,800 £0 £ 9,000
Year four £ 7,800 £ 5,000 £0 £ 7,800

Table two: example of return to invoice GAP insurance based on typical four-year PVP on vehicle costing £20,000

Term Car depreciating value Outstanding finance GAP potential Claim Car insurance potential claim
Year one £20,000 £16,400 £ 8,400 £11,600
Year two £20,000 £12,600 £ 9,800 £10,200
Year three £20,000 £8,800 £11,000 £ 9,000
Year four £20,000 £ 5,000 £12,200 £ 7,800

Next Steps

If you decide that peace of mind is important to you and that you would like to take out a GAP insurance policy think about exactly what you want to achieve. If it’s just to prevent you dropping into debt, then a finance GAP policy may suffice but please don’t pay much for it! It really should be as cheap as chips unless your circumstances are very unusual.

We would probably recommend a return to invoice or vehicle replacement policy in most circumstances as these have far more value but remember the chances of you actually making a claim are fairly remote so don’t feel pressured into buying a policy if you are not inclined to.

Finally, if you do wish to take out GAP insurance you are likely to pay well over the odds if you buy it from the dealer which sells you the car. We recommend you shop online for a much better deal. ALA has an extensive range of add-on insurance policies including GAP insurance, at competitive prices, click here.