What Is GAP Insurance?
GAP insurance is an insurance product designed to compensate you for the difference between the purchase price or financed value of your car and the payout you receive from your car insurance company if your car is written off.
Let me explain.
When you purchase a car, you normally tell your insurance company the purchase price. They use this as the ‘insured value’ on your insurance policy.
However, if your car is written off – even within a short time of your purchasing it – your insurance payout will almost certainly be less than the insured value – often quite a lot less.
There are several reasons for this:
- Insurance payouts reflect the current value of your car – not the purchase price
- Insurance companies will often try to pay out closer to trade/private sale price than retail price
- If you bought your car new, it will have depreciated in value the moment you drove it out of the showroom, possibly by several thousand pounds
- If you have owned the car for some time, it will naturally have depreciated in value anyway
Insurance companies would say their system is fair – why should you get back the purchase price of a car you may have bought some time ago?
I think that this is fair too, but there is one huge problem with this if you have bought the car on finance:
You may owe the finance company more than the amount of the insurance payout
Remember, even though the car has been written off, you still owe the finance company the money you borrowed to buy the car.
So, to sum up, there are two reasons to purchase GAP Insurance for your car:
- To protect yourself against the risk of owing the finance company money after your car has been written off.
- To enable yourself to spend the same amount of money on a replacement car, even though your car has depreciated and/or your insurance payout is less than you originally paid.
Types of GAP Insurance
There are two main types of GAP Insurance:
Return To Invoice (RTI) GAP Insurance
RTI GAP insurance aims to pay out the difference between the amount you originally paid for your car (what’s on the sales invoice) and the amount your insurance company pays you if it’s written off.
If you are buying a used car, then it is worth checking the exact terms and conditions of the payout before you purchase GAP Insurance.
Some RTI policies will pay out based on your invoice price, but some will only pay a certain percentage of the car’s book price, often 110%. The ‘book’ they refer to is Glass’s Guide, the used car price guide used by virtually all car dealers.
For example, if you paid £5,000 for a second-hand car, but the Glass’s price was £4,250, then at 110% of Glass’s Guide price, your payout would be limited to £4,675. Make sure you understand what payout you might get before you pay for GAP insurance.
Financial Shortfall Insurance
The purpose of financial shortfall insurance is simply to make sure that you do not end up owing the finance company any money after your car is written off.
This means that they will pay out any extra that is required on top of your insurance payout in order to satisfy the finance company’s requirements. You won’t get any money yourself.