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Is gap insurance worth it?

Gap insurance is designed to work alongside your standard car insurance. It’s additional cover that can assist you financially if something unfortunate should happen to your car. If your new, or even second hand, vehicle is stolen or involved in a traffic accident, resulting in it being written off, then gap car insurance will ensure you don’t face a loss.

You might think your standard car insurance policy covers you in the event of a theft or write-off scenario. In some instances, it will, making gap insurance not appropriate for your needs. However, due to the rapid depreciation of new cars, in many cases your standard car insurance policy will not fully cover you in the same way. 

Brand new cars lose a third of their value as soon as you get comfy behind the wheel and pull out of the dealership. After your first year of owning it, your car will drop by around 40 percent in value and after three years this fall is typically around 60 percent. If your car is the subject of a theft or is irreparable and written off after an accident, then your car insurer will usually only pay out a sum of money known as the ‘maximum’ or ‘total loss’ equivalent to the car’s value at the time of claim. This figure is likely to be far less than the amount you originally bought your vehicle for due to its depreciation, which means you’ll be taking a loss. If you want to replace your car with a brand new vehicle, you’ll have to come up with the extra money yourself.

That is, unless you’ve got gap car insurance. Guaranteed Asset Protection (GAP) insurance covers the difference between what your policy will pay out and the original price or value of your stolen or written off vehicle, meaning you’re not running at a loss if worst comes to worst.

There are car insurance policies that cover car buyers for the first, and even in some cases the second, year of ownership, with the offer of a brand new replacement vehicle if it’s stolen or written off. If your policy states this then gap car insurance won’t be worth acquiring, however, there are many instances in which it can be useful. If you’ve ever wondered: ‘is gap insurance worth it?’ then read on for some answers.

Is gap insurance worth it for a used car?

While more commonly associated with cars that are new, gap car insurance policies are sometimes taken out on used vehicles. The reputation of used cars as old bangers and bone shakers is not one that holds true these days with people often changing their car after just a year. With the many forms of finance agreements, people change their car far more regularly, which means used cars can be found in great condition with very low mileage on the clock.

Used cars don’t depreciate at the same rate as new cars. Whereas after three years a new car will have lost 60 percent of its value, a used car will typically have dropped by only 25 percent in the same amount of time.

As gap car insurance covers the depreciation, and a used car drops in value much slower than a new car, a policy of this kind may not be worth it. 

Is gap insurance worth it on a second hand car?

It’s perfectly possible to take out gap car insurance on a second hand car, as stated above, but it won’t be as rewarding in most cases as the amount covered for the value dropped on a new car. Second hand cars that are seven years or over in age won’t be able to secure gap car insurance. At this age, gap car insurers won’t be willing to offer this type of policy.

Return to Value gap car insurance is the type normally suggested to owners of a second hand vehicle. Return to value gap cover pays out the difference between your car insurance policy’s maximum or total loss payment and the value of your vehicle when it was new.

If you bought your second hand car at a discount, then you can profit from this type of gap insurance. For example, if you pay £16,000 for a second hand car with value on the market of £17,000. If your car insurer pays out £10,000 when it’s written off or stolen, you can then claim £7,000 with a return to value gap insurance policy even though you paid £1,000 less when you purchased the vehicle.

Is gap insurance worth it on a lease?

If you lease hired your vehicle, gap car insurance can be a useful policy to have. If your car is written off or stolen before the end of your lease agreement then your car insurance will only pay out what it’s worth at the time of claiming. Due to depreciation and interest rates, the amount you receive from your car insurer will not be as much as the outstanding finance on your lease agreement. You’ll either need to cover the shortfall yourself and pay off any outstanding debt, or keep paying your monthly hire payments for a car you can’t drive.

However, if you’ve got gap car insurance, it’ll cover the gap between the remaining amount you owe on your car lease and the sum your car insurance will pay out leaving you debt free.

Is gap insurance worth it on a new car?

Gap car insurance is often sold alongside new cars when bought through dealerships. Although prices vary, up to three years’ worth of cover can cost you between £300 to £375, but you’ll find a lot less expensive options online from specialty car insurers and online brokers.

New cars often offer the greatest value on gap car insurance policies. A Return to Invoice or RTI gap insurance policy is designed to cover the difference between what your car insurance company will pay out and what you originally paid for your vehicle, if it’s either stolen or part of an accident that means it can’t be repaired and must be written off.

Since cars lose the most value in their first three years, if you need to make a claim on your standard insurance it won’t pay out anywhere close to the sum you paid for the new vehicle. Gap insurance covers this difference so the more your car has depreciated, the bigger the payout will be and the more worthwhile this type of insurance is to you.

There are a few circumstances where gap car insurance might not be worth getting when buying a new car. Many new car insurance policies will provide you with a brand new car if yours is stolen or written off in the first year, and sometimes this will cover an extended period of up to two years. Always check your standard car insurance policy first before obtaining gap car insurance, because you may already be covered.

Most car insurance policies will provide you with a car that is like-for-like regarding age, make, model and spec for your car at the time of claiming. If you don’t require a completely new car and will be happy with one comparable to the one at the age it was when stolen or written off, then gap car insurance probably isn’t for you.

Finally, if your car is written off or stolen and your car insurance will only cover some of your loss, but you’re prepared to put up the extra funds yourself to purchase a new car instead of a like-for-like vehicle, then you can manage without gap car insurance.

Is gap insurance worth it on PCP?

You’ll find specific gap car insurance policies designed to assist with finance deals like PCP (Personal Contract Plan) covering the gap between outstanding amounts owed and the total loss or maximum pay out from car insurers.

If you’ve used a PCP deal to help you buy your car, gap car insurance can be worth looking into. If your car, bought with a finance agreement, is stolen or written off then the insurance payout you receive from regular insurance might not cover your outstanding debt. If this is the case, you’ll either need to keep up your regular monthly payment on a vehicle you don’t get any use from or settle the total remaining on your finance agreement.

Gap car insurance, suited for finance, will cover any difference between your car insurance policy and the total outstanding amount on your agreement. This will allow you to resolve any outstanding finance.

Gap car insurance is particularly useful if your finance deal charges you high rates of interest. It’s also a valid option if your personal contract plan is spread over an extensive period, for example, over five years or if you only used a small deposit when buying the car.

While gap car insurance is worthwhile for most kinds of finance deals, it’s especially so with PCPs. At the end of a Personal Contract Plan, if you wish to keep the car, you’ll have a large one-off sum to pay, known as a balloon payment. With no extra insurance in place to cover this amount, if your vehicle is written off, you'll have to settle this large outstanding payment yourself, and for a vehicle which has either been stolen or scrapped.