What is GAP Insurance? Everything you need to know

While car insurance gives you a certain amount of peace of mind (as well as being a legal requirement to drive on the road), there are times when the financial impact of an incident can have much more long-term effects, especially if you buy a new car on finance. If you have to put in a ‘total loss’ claim for a car that’s been stolen or written off, the value of your car insurance may not cover the actual worth of the vehicle. That’s where GAP insurance comes in.

What is GAP insurance?

When a car is written off, your motor insurer will typically settle the claim based on the vehicle’s market value immediately before the loss, subject to the policy terms. However, this could be much lower than the price you paid, leaving you in a situation where you may owe more on your finance than the insurance payout. This is known as a shortfall and is why GAP cover is sometimes also referred to as shortfall cover. Depending on the type of policy, GAP insurance can cover a shortfall between the motor insurer’s settlement and the amount originally paid for the vehicle, its replacement cost or the amount needed to settle outstanding finance.

Do I need GAP insurance?

If you buy a new vehicle on finance, you may ask yourself, “Do I need GAP insurance as well as my normal car insurance?” Whether you need GAP protection depends on your circumstances. If you have bought a vehicle on finance, are leasing a car or have purchased a vehicle that could depreciate significantly, it may be worth considering whether GAP cover could protect you against a potential financial shortfall.

The value of your investment will go down as soon as the wheels leave the forecourt. A significant proportion of new cars are bought using finance, which means depreciation can create a potential shortfall between the vehicle’s market value and the amount still owed. But if a vehicle subject to a finance deal is stolen or involved in a collision or other accident, the vehicle’s market value may be significantly lower than the price you originally paid. In essence, you may still be paying off the finance on a relatively new car even though its market value has fallen significantly. That’s why if you do buy a new car, GAP insurance is well worth considering.

The same applies if you lease a car or purchase a particularly expensive car. If you lease a car, your lease agreement may require or recommend a particular form of GAP or shortfall protection, so it’s important to check the terms of your agreement. For high-value cars that depreciate quickly, the gap between the purchase price and the claim payout could be considerable. Without GAP insurance, you could be left paying the difference out of your own pocket.

Why is GAP insurance important?

GAP insurance protects you from the financial shock of vehicle depreciation if your car is written off or stolen. Standard motor insurance will typically settle a total-loss claim according to the policy’s valuation basis, often using the vehicle’s market value immediately before the loss. This may be lower than the amount originally paid or the finance balance still outstanding. GAP insurance for cars fills that shortfall so you’re not left with debt or unexpected costs.

What does GAP Insurance cover?

This specialist insurance policy creates a second ‘layer’ of financial protection that sits on top of your standard motor insurance. It can be beneficial when your car is declared a total loss (written off or stolen) and your insurer’s payout is less than what you paid, owe, or need to replace the vehicle.

There are several different types of GAP insurance for cars, including:

• Finance GAP – This type of GAP cover is designed to help meet a shortfall between the motor insurer’s settlement and the amount required to settle eligible outstanding finance on the vehicle, subject to the policy terms.
• Return to Invoice GAP – This type of policy can cover the difference between the amount originally paid for the vehicle and the settlement provided by your motor insurer following a total loss. Eligibility criteria, including the age, mileage and purchase circumstances of the vehicle and the time allowed to purchase the policy, vary between providers.
• Vehicle Replacement GAP – This covers the difference between your insurer’s market value payout and the cost of a new equivalent vehicle at today’s price, protecting you against both depreciation and price inflation.
• Lease/Contract Hire GAP – If you lease a car or have a vehicle on contract hire and it is written off, Lease/Contract Hire GAP covers early termination fees, remaining lease payments, and settlement charges. It ensures you don’t have to pay to end a lease on a car you no longer have.

Who might not need GAP insurance?

Not everyone needs GAP insurance. Older cars that have already depreciated well below their original price reach a point where they become price-stable (meaning they are unlikely to lose any more value as time goes on). As the insurance cover is a more accurate representation of their actual net worth, there is no need to top up your cover with a GAP policy.

There is little benefit in taking out a GAP policy for a car bought for cash, either, as there will be no outstanding finance to worry about if the car is written off.

What's covered

The key takeaway is that a vehicle has to be regarded as a ‘total loss’ for the GAP cover to activate. If it’s stolen and not recovered or recovered in such poor condition that it is written off, the insurance company will categorise it as a total loss, and GAP insurance will also kick in to cover the difference in value.

The same applies if a vehicle is damaged beyond repair after an accident and the insurance provider writes it off. Depending on the type of GAP policy, the policy may then provide a benefit towards an eligible shortfall between the motor insurer’s settlement and the amount required under the relevant finance agreement.

What's not covered

GAP insurance does not cover partial damage, repairs, mechanical issues, cosmetic problems, or anything already excluded by your main motor policy. It only covers the financial shortfall after a total loss. If you can repair a vehicle, you cannot claim on your GAP policy. Likewise, GAP insurance for cars doesn’t cover normal depreciation when the vehicle is still on the road, or if the market value changes while the vehicle is still running.

How much does GAP insurance cost?

That depends on whether you buy GAP insurance from the dealership or talk to a broker, who can find a more competitively priced option for you. Third-party shortfall protection may be cheaper but remember to check exactly what you are covered against. Also look at the duration of the policy – does it apply only for one year, or for the full length of your finance agreement?

The insurer's valuation of your vehicle will affect any payout you receive. Check whether there is an excess you must pay before you receive the remaining value.

Can I buy GAP insurance after buying or leasing a car?

You may be able to buy a GAP policy after buying or leasing a vehicle, but eligibility and time limits vary between policies. Some providers impose a specific period after purchase or lease commencement, so check the policy terms before buying.

How long does GAP insurance last?

GAP insurance policies can be short-term or last the full length of your finance agreement. The level of cover affects the premiums you pay for GAP cover.

GAP insurance vs comprehensive insurance

Comprehensive insurance is a form of motor insurance that can cover damage to your vehicle as well as risks such as theft, subject to the policy terms. Third-party motor insurance is the minimum level of cover generally required by law for vehicles used on UK roads. GAP cover is optional and serves a different purpose: protecting against certain financial shortfalls following a total loss.

Is GAP right for you? Ask Park Insurance

GAP insurance is a safety net that protects you against financial shortfalls between the original value of your vehicle and the insurance payout if the car is regarded as a total loss. For new cars on finance, that shortfall can be considerable and, without GAP cover, you could end up paying for a car you cannot even drive any more. For older cars or vehicles that have reached a depreciation ‘plateau’ where the value of the insurance is comparable with the market value of the car, there is no reason to add GAP to your insurance portfolio.

If you’re still wondering “Do I need GAP insurance?”, take a look at our GAP insurance Service Page for more information. If you’re ready to add GAP cover to your car policy, contact us today for a bespoke quote.