If you're unlucky enough to be involved in an accident that results in your vehicle being written off by your insurance company, the reality is that the amount you are paid out on the policy will be less than the amount you actually paid for the car in the first place. This is due to depreciation of the cars value as it gets older, meaning the longer you own the car before the accident, the larger the difference is likely to be. This is where Gap Insurance comes in - it is an additional policy you can purchase on top of your main insurance that will cover any difference between what you paid for the car and its current market value.
According to figures from The AA, a new car will lose 60% of its value after just three years. Taking out gap insurance could help ease any financial burden that you may be left with should your car be written off, and should be seriously considered for high value cars that will lose a large amount of value.
For example, if you paid £12,000 for a new car and wrote it off after three years, its current market value would only be £4,800 which would be the amount you would recieve from your insurance company. This would not be enough to buy the equivalent new car, and unlikely to be enough to repay what you might still owe on your finance deal, which you would then have to continue repaying until the balance has been paid in full.
Gap insurance is typically available for cars up to seven years old with fewer than 80,000 miles on the clock, but this can vary between different providers. Therefore it's esssntial you read the smallprint of any policy you take out to ensure it will cover your vehicle once it passes a certain age or mileage.
There are three main types of gap insurance:
Finance GAP insurance covers you if you’ve borrowed money to buy the car. At the time it is written off you might still owe more than the market value of the car. Finance GAP insurance will pay the finance company enough to cover the outstanding balance.
Return-to-invoice insurance boosts the payment from your insurance provider so that you get back the total amount you paid for the car. New Car Gap Insurance is similar to return-to-invoice insurance, but is designed to compensate for the rising cost of cars with inflation.
New car Gap Insurance ensures you get your money back plus extra, meaning you can replace your car for a new one of the same model and specification. This type of policy can only be bought for new cars, however with many standard insurance policies offering new-for-old cover on cars up to 12 months old, it can be a bit of a gamble taking out this kind of policy. Some insurers offer the choice of a deferred start date to conpensate for this meaning you can chose to start your policy as soon as you main insurance no longer offers new for old cover.
Some other key things to look out for when taking out a Gap Insurance policy are: