How Does Gap Insurance Work
Gap insurance is not something you may have heard of, but it can be very valuable and worth considering in many cases. Should your car be written off or stolen and there is a difference in value between what you paid for the vehicle and what your insurer will pay out, Gap insurance would cover that difference.
Gap Insurance Explained
Sometimes the amount you pay is not the same as the amount the insurance company value the vehicle as being worth. Let’s assume a scenario where a dealer sells a car for £20k. The proud owner takes the vehicle home but sadly it is stolen a week later. They dutifully submit their claim, and to their horror the insurance company deems the market value of the car to be only £15k. This in itself is hard to take but now imagine the vehicle was on finance and the company are naturally calling in the loan. The owner can hand over the cheque for £15k but find themselves with an unmanageable bill for £5k. This is actually a best-case scenario when it comes to new vehicles, as they depreciate exponentially in the first three years, so in the same situation as above, the car is written off after four years of ownership, and the insurance company only gives a value of £10k, the gap just got worse. If the owner had Gap insurance, they could claim the remaining balance from that policy and not have to worry.
Who Needs Gap Insurance?
Well, in all honesty, Gap insurance is worth thinking about in every car purchase but doesn’t really prove valuable in certain situations. Consider Gap insurance in the following scenarios.
Long Term Lease Vehicle
There could well be a difference in what you owe and what is paid out if you have a car with a long-term lease that includes mileage allowances.
Large Loan Vehicles
It stands to reason that if you are playing with large sums of money, you should cover yourself. As mentioned above, you could find that you are in debt to the finance company if you do not have Gap insurance.
However, there is one exception, and that is brand new cars – but check the small print.
With some brand new cars, the insurance will stipulate a like for like replacement with no quibble if the vehicle is written off in the first 12 months of ownership. Now, you might think that you would do well to set a calendar reminder to purchase Gap insurance a year after, but again exercise caution. Many Gap providers insist that the policy is purchased within a year of buying the car, so if that is the case you would need to purchase by month 11 of ownership. There are some that will allow you to acquire with the vehicle and defer the cover for a year to avoid any over insurance issues. Many Gap policies are introduced in the car dealership, but you do not have to purchase there and should check around for levels of cover and best pricing before you commit.