What is gap insurance and what does it cover you for?
Gap Insurance stands for Guaranteed Asset Protection insurance, and it simply provides cover for the difference between the amount you paid for a car and the amount you get from your insurance company at payout. Simply put, the gap insurance cover will take care of your loss and the amount you owe your auto lenders when there is an accident or after the theft of your car.
How Does Gap Insurance Works?
If you have purchased a new car, a gap insurance policy will cover the specific loss in value especially if your vehicle is written off as a result of an accident.
If for instance you crash your car and it became a write-off, your insurance company will only pay out the current value of the car and not the brand-new value. This payout will surely be much less than the actual price you paid for the car when it was brand new.
In addition to paying the loss in value, gap insurance will also pay the amount you are still owing, especially if you purchase the car on finance, and your car insurance is simply not enough to pay such car finance loan. Most gap insurance policies last for between 4 and 5 years until you file a claim. Fortunately, your car dealership may offer you a gap insurance cover when you purchase a new car from them and you can approach an insurance company online.
Under the gap insurance policy, the total loss of a car is when you crash or damage your car and your car insurance company decides that the cost of repair is far greater than the current value of the car. This situation is also known as a write-off.
Your car may also be considered a total loss if it was stolen and never recovered. If your insurance decides that your car is a total loss, they will simply dispose of it and then pay you the car’s current market value.
What Does Gap Insurance Insures? Types of Policies You Can Get
There are 4 different types of gap insurance you can choose from, these are;
- Vehicle replacement gap insurance.
- Return to Invoice gap insurance.
- Return to value gap insurance.
- The Finance gap insurance.
The Vehicle replacement gap insurance covers the difference between the lump sum you get from your insurance company and the amount it will cost you to buy the same car in a brand-new state. This means you can get more than you paid for the car to allow for the rising costs of the car.
The return to invoice gap insurance is a type of insurance that covers the shortfall between the amount of payout you got from your insurance company and the amount you paid for your car when you bought it brand new. One of the benefits of this option is that it can be used to cover both new and second-hand or fairly used cars.
The Return to value gap insurance will cover the difference between the payout received from the insurance company, and the market value of the car when you purchased it. This policy could payout than the Return to invoice gap insurance especially if you got a discount at the time you purchased the car.
The finance gap insurance is a type of car insurance that simply cover all the money you owe your car finance company especially if your insurance company didn’t repay your debt. This simply means you wouldn’t have any car or cash after you make an insurance claim, but all your debt will be completely paid off.
The option you choose will largely depend on how you purchased your car, and whether you will consider buying a new car if your current car has been written off. In the UK, any gap insurance you choose can cover you up to 5 years and your maximum insurance claim limit can vary from £25,000 and £100,000, depending on the type of gap insurance you choose.
When Will You Likely Need a Gap Insurance?
You may not need gap insurance under every circumstance, but if you use a personal loan or a car finance loan from a lender to purchase a brand-new car and it becomes written off then you will need gap insurance because your insurance company may not pay your outstanding loans completely. You will need a gap insurance cover if your car finance or loan deal comes with a very high-interest rate.
You will also need gap insurance if your finance deal or personal loan is a long-term one that extends up to 5 years, or the initial deposit you made on purchasing the car is very small or you have a large one-off payment to be made at the end of the car finance or loan term. Keep in mind that gap insurance is also helpful if the value of your car depreciates quickly. Some cars can lose up to 70% of their initial values after 3 years.
It is important to note that gap insurance may not cover your car in some situations, hence you should be aware of this situation when applying for car insurance. Any claim where your insurance company has not declared your car a complete loss will not be covered or processed by gap insurance. Any value that has been added through modifications to your car after you purchase it, will not be covered under gap insurance. Excess payments on car insurance that are higher than about £250 will not be covered. Any loss caused by uncovered activities such as car racing rallying or any other competitive event is not covered under gap insurance. Similarly, if you don’t have a comprehensive car insurance policy, you will not be covered by gap insurance. For these reasons, it is important to check all information, especially the clauses attached to a gap insurance policy before you sign up for such. Some insurance companies may have several additions to the things excluded from your gap insurance coverage.