What is GAP insurance?
GAP insurance is a policy that is designed to cover the difference between what you paid for the car originally and what the insurance company pays out in case of a write off.
Cars depreciate in value and if you have the misfortune to have a car written off, the amount an insurance company is willing to pay out is based on its value at the time of the accident. If the accident occurs several years after you have bought the car then the pay-out could be a lot less than you originally paid for the car.
This is where GAP insurance comes in, which is designed to pay out the difference. Whether ensuring you're able to easily find a direct replacement, or avoid having to repay more than the car is worth to settle outstanding finance.
GAP insurance is particularly important if you have bought a new or used car on finance, as the amount of loan due to be repaid - the settlement value - could be more than the write-off value of your car; you won't just lose the ability to replace your vehicle, you'll still be liable for the remaining finance.
This could be particularly frustrating with higher-interest rate used-car finance, or if you've taken out a personal loan to buy a car. If you've chosen a finance product with a balloon payment - such as PCP or leasing - you may have been offered GAP insurance by the dealer. You can shop around for other products.
Brand-new car buyers will find VRI - vehicle replacement insurance - the most beneficial, as this will cover the extra amount between insurance settlement, and a replacement car of similar value. It's generally only applicable to a new car purchase below 500 miles.
Secondhand car buyers can benefit from RTI - return to invoice - which will cover the difference up to the finance settlement amount, or the amount you paid for the car; whichever is the greater. This is also useful for new or used cars on lease, where you're still liable for the remaining payments - but your car insurance may have provisions to cover this too.
Buyers of older cars, and drivers looking for extra insurance on their older vehicle can take out RTV - return to value - insurance, which will provide the cash needed to bring an insurance settlement up to the value of the car when the GAP insurance was taken out. This is good for private buyers, but remember to check the price of the car you're buying is fair, as RTV is based on secondhand retail value at the time of purchase.
Although GAP insurance is useful when you buy a new car, as depreciation is always at its greatest in the first three years of a car’s life, it's also well worth considering for cars aged between three and seven years old, where insurance settlement and retail replacement can have a significant difference in cost. What’s more, it’s not just cars that can be covered but van and pickup owners can also take out a GAP policy to cover their LCV vans and pickups, too.
Choosing a GAP policy
But how do you know if a GAP insurance policy is for you, and if so which one is the right one? There are three kinds, which cover risks from finance shortfall, to securing a brand-new car of the same make and model. Read our guide to GAP insurance to learn more.