Motorists who buy new and used cars from a dealer may well be offered gap insurance. Once little known, this type of cover is increasing in popularity. What exactly is gap insurance, and do you need it?
Cars depreciate after purchase, particularly during the first year. A new car can drop in value by as much as a third as soon as a new owner drives it off a dealer’s forecourt.
If you’re unfortunate enough to either have a car accident or become a victim of car theft, and your vehicle is written off, a standard insurance policy will only pay what the vehicle was worth at the time of the loss. Gap insurance tops up the difference so you’ll receive the full sum for a like for like replacement.
It’s known as Guaranteed Asset Protection, GAP insurance. It covers the difference between the price you paid for the vehicle, and the amount it is worth at the time of an insurance claim. Most gap policies run for three years, the time in which a new car’s depreciation is at its steepest rate and will usually cost between £100 to £300.
Critics of the policy say it can sometimes be pushed on buyers by the motor trade, without a proper explanation of what it is and why you might need it. It is important to remember you will only receive a pay out if your car is declared a complete write off, plus, you need to have a fully comprehensive insurance policy to make a gap insurance claim.
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Many insurers will replace your car with a brand-new model if you buy it from new and it’s written off within the first year. So, in what circumstances might gap insurance come in handy?
If you are one of the many people in the UK who bought a car on finance, gap insurance can help protect this investment. If your car is written off while you still owe money on it, the insurance pay out may not cover the payments you still have to make, let alone a replacement vehicle. Because gap insurance means you won’t be left owing money on a vehicle that no longer exists.
Gap insurance may be for you, depending on the vehicle you’re buying and how worried you are about depreciation and the potential result of an insurance claim. So, it’s important you consider both the advantages and disadvantages before making your final decision.
