What is GAP Insurance – The Basics

Not everyone has heard of GAP insurance, though you’ll certainly be aware of other car insurance options on the market. GAP insurance is something you can invest in, in addition to your regular vehicle insurance. To help you get a better understanding of how GAP insurance works, we’ve explored the topic in more detail below:

What is GAP Insurance?

GAP insurance, or Guaranteed Asset Protection insurance, is a type of insurance you can opt into, alongside your normal car insurance. The idea is that when you have GAP insurance, should your vehicle be written off, you wouldn’t just have to rely on the funds paid out by your primary insurance company, which would be based on their valuation of the vehicle. Whether or not the damage was deemed to be your fault will also likely be a factor in the settlement amount.

GAP insurance is often offered to people who have taken out car finance on their vehicle. This is because, if your car is written off, you don’t just have to worry about replacing the vehicle and paying damage costs. You’d also need to settle the outstanding balance on the car that is no longer roadworthy.

If your vehicle was on finance, but you’ve already settled the loan, you may be able to purchase a similar vehicle with your insurance claim, in the event of it being written off. But if you wish to buy a newer, or better model, you’d need to cover the price difference using your own funds.

GAP insurance

Do I Need GAP Insurance?

Unlike other forms of car insurance, GAP insurance is not a legal requirement. It’s a completely optional form of insurance, and some people tend to appreciate having it more than others. The question you should ask yourself is whether you could afford to settle the outstanding finance on your vehicle, as well as paying for a replacement vehicle, in the event that yours is written off.

Essentially, if you took out car finance to spread the cost of the vehicle, but have enough savings to cover the balance, you probably don’t need GAP insurance. But if you can’t comfortably afford to replace your car, as well as settle the vehicle loan, taking out GAP insurance can provide you with complete peace of mind. That way, you’ll know that even if your financed car is written off, you should not be liable for the costs.

Types of GAP Insurance

As with normal car insurance, there is more than one sort of GAP insurance policy available. There are four main types to choose from – invoice GAP insurance, replacement GAP insurance, contract hire GAP insurance, and top-up GAP insurance. Before committing to one of these choices, it’s a good idea to learn a bit about each of them first. To help you get started, we’ve explored these types of insurance in more detail below:

Invoice GAP Insurance

Perhaps the most popular type of GAP insurance, Invoice GAP insurance is one of the highest levels of cover offered by dealers. Should your vehicle be classified as a Total Loss, which means it will be written off, this level of insurance will cover the difference between your normal insurer’s valuation of the car and either the outstanding finance amount or the original invoice price of the vehicle.

It’s important to note that the greater amount will be paid out. So if you had £5,000 remaining finance left on the vehicle, and you bought the car for £10,000, the latter figure would be used when calculating your Invoice GAP insurance payout.

The idea is that if you make a claim, because your regular insurance will be topped up by Invoice GAP insurance, you’ll be able to clear any outstanding finance on the vehicle, and then have money left over to put towards another car.

Replacement GAP Insurance

As the highest level of GAP insurance available, Replacement GAP insurance is similar to Invoice GAP insurance, except there are more options should your car be written off. The Replacement GAP insurer should pay the difference between your main insurer’s valuation of the car, and the highest option of the below:

  • The original invoice price of your vehicle
  • The outstanding finance amount, excluding any negative equity that has been carried over from a previous vehicle
  • The cost of replacing your vehicle with a brand new version of the same make and model

This level of cover can really help give you peace of mind, as it allows for any eventuality. Even if your vehicle is declared a Total Loss, you’ll be able to settle any outstanding finance, and should have money left over to spend on a new vehicle.

GAP car insurance

Contract Hire GAP Insurance

With a Contract Hire GAP insurance policy, the shortfall between the figures provided by your insurance company and finance company is paid by the GAP insurer. For instance, if your car is written off, your finance company will calculate a settlement figure, based on things like the rough amount your vehicle was worth before the accident, any early settlement fees, and the remaining balance on your finance agreement.

What your insurer pays out is unlikely to match the settlement your finance company comes up with. This is where Contract Hire GAP insurance comes in. The difference will be paid by your GAP insurance company, to settle your vehicle finance deal.

Top-Up GAP Insurance

If you opt for Top-Up GAP insurance, you’ll be signing up for an annually renewable agreement. In order to qualify, your vehicle would have to be no older than eight years old, and worth up to £80,000.

With this type of GAP insurance, if your car is written off, the pay-out from your motor insurance company should be ‘topped-up’ by up to 25%. You may even be able to claim back some of any excess payable to your insurer – Top-Up GAP insurance can cover up to £250 as part of a Total Loss claim.

Which Type of GAP Insurance is Best?

There’s no simple answer to this question, as the type of GAP insurance that would be most suitable for you, or if you should apply for GAP insurance in the first place, will depend on your individual circumstances. You’ll need to weigh up the pros and cons, then see what’s the best fit for you.

If you have any questions about GAP insurance, or any aspect of vehicle finance, it’s a good idea to speak to a professional. Get in touch with Vehicle Finance Today, and we’d be happy to answer any queries you may have!

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