If your car was stolen or written off, would your insurance cover your claim? When an insurance policy pays out, it won’t be for the amount you paid for your car – it will be for the current market value of your vehicle.
This means that if you have purchased your car using a car lease or personal contract hire agreement, you could be left out of pocket. That’s why many people choose to take out Guaranteed Asset Protection (GAP) insurance. Here, we outline everything you need to know about GAP insurance and how it can benefit you.
What is GAP insurance?
If your vehicle is written off by your insurer, a GAP insurance policy is designed to pay the difference between your comprehensive insurance settlement and either your outstanding finance or the replacement cost of your vehicle, whichever is the higher amount.
Why do I need GAP insurance?
When you buy a new car, the value of the vehicle will depreciate. On average, a new car will lose around 50-60 per cent of its value in the first 3 years. GAP insurance protects you against the financial risk of receiving an insurance payment based on the current, rather than the purchase, value of your car.
How much GAP insurance do I need?
This depends on how you financed the purchase of your car.
If you bought the car using a car lease, you should check with the finance company what they charge if you terminate your contract because the car has been written off. Many leasing companies charge 50 – 60 per cent of the outstanding payments whilst some will charge you 100 per cent.
In short, you would need sufficient GAP insurance to cover the difference between the value of your vehicle and the invoice/replacement cost.
What is ‘contract hire’ GAP insurance?
Contract hire GAP insurance is designed to clear the outstanding payments on your personal contract hire agreement as well as any shortfall between the residual value and your insurance settlement.
What should a good GAP insurance policy offer?
First, a GAP insurance policy should let you transfer the cover if you sell the vehicle. A good GAP insurance policy will let you transfer any unused premium free of charge and deduct this from the price of a policy on your new car.
It is also beneficial to take out a policy from a UK based insurer. If you buy a GAP insurance policy underwritten by a company regulated in the UK and they cease trading, your policy is protected under the Financial Services Compensation Scheme.
In addition, a number of motor insurers may offer you new-for-old replacement on brand new vehicles in the first year. However, during that first year your insurance company can revert back to paying only the market value for various reasons- for example because of the mileage or condition of the vehicle and in some instances if the vehicle is stolen.
It is advisable to have a GAP insurance policy running alongside this new-for-old period. If your insurer does settle at market value then the policy will step in and cover the shortfall.
