Gap insurance can give you vital financial protection if something happens to your car, but it could prove unnecessary and expensive for some.
We explain what car gap insurance is, and show you how to decide whether it is worthwhile for you.
What is gap insurance?
Gap insurance is designed to supplement your car insurance and give you extra financial protection if you need to make a claim. It can be beneficial as even fully comprehensive car insurance tends only to extend new for old cover to vehicles up to 12 months old - and not all insurers do this.
This means if your car is written off or stolen after this period the most your insurer will pay out is its current market value.
As the value of most cars depreciates quickly once they're driven off the forecourt, you stand to lose a significant amount on what you paid originally and get left liable for any outstanding finance on your vehicle.
Essentially gap insurance for cars is designed to plug the shortfall between the amount your insurer will payout for a 'total loss' claim and either the 'real' cost of a replacement or the outstanding finance you have left to pay on your car. For example:
- You buy a car for £16,000.
- 15 months down the line, you make a 'total loss' claim on your car insurance after an accident and receive £10,000.
- In this case you would be able to claim £6,000 back from your RTI gap insurance to bring your total insurance payouts up to the amount you originally paid for your car.
- You can then use this money to clear outstanding finance on your vehicle, or to cover the cost of a new replacement.
Without gap insurance (also known as Value Protection Insurance) you would have to make up the difference out of your own income or savings.
Do I need car gap insurance?
Gap insurance can be particularly worthwhile if you bought your car on finance or took out a loan to pay for it, as it would protect you financially if your car insurance payout isn't enough to clear the remaining balance. It can also be a good idea if you're leasing your car as again, you could be left liable to cover the cost of the remaining contract if your insurer failed to do so.
Essentially it's worthwhile considering gap insurance if it's possible that you could get left paying for a car that you no longer have, and that you couldn't afford to replace if it was written off or stolen.
If you have an expensive car that you know quickly loses value and you're concerned about being able to afford to replace it with an identical make or model if the worst happens, gap insurance could give you much needed peace of mind too.
However, it is not right for everyone; it's really only worthwhile if your policy costs less than the amount you are likely to claim on it. This means that those with cars that lose their value quickly are more likely to benefit from gap insurance than those with cars that retain their value well. As such it is a good idea to research the likely depreciation of your vehicle before you take out a policy.
What type of cover do I need?
There are three main types of gap insurance, they each offer different levels of financial protection so you need to decide which best suits your requirements before you buy:
Return To Invoice gap insurance (RTI)
RTI gap insurance covers you for the difference between a claim on your car insurance and the amount you originally paid for the car (the invoice price).
For example, if you write off a car you paid £25,000 for after 18 months, you may only receive £13,000 (its current market value) from your standard car insurance, leaving you £12,000 out of pocket. If you had a return to invoice policy you would be able to claim the £12,000 back to make up the difference.
Return to value gap insurance is equally suitable for those who buy a new car as it is for those who buy a second hand vehicle, but it's limited to those who've very recently purchased their car.
Vehicle replacement gap insurance (VRI)
Vehicle Replacement Insurance makes up the difference between the amount you receive for a 'total loss' claim on your car insurance and the cost of an exact replacement, even if its price has gone up.
If you have a relatively new car this would mean you'd get a brand new replacement of the same make, model and specification as you had previously.
If that model had been superseded by a new version, you would get the latest car even if it was more expensive. If you had a second hand or older car, you'd get a replacement car that was as closely matched to yours in terms of specification and mileage as possible.
Return to value gap insurance (RTV)
RTV gap insurance is designed for people who don't take out a policy immediately upon buying their car, but rather a few months down the line. It makes up the difference between the 'market value' payout you get from your car insurance company, and the amount your car was worth when you took out gap insurance.
This type of policy can be for cars bought new or second hand; however it cannot be taken out immediately (that would make it Return To Invoice insurance) so is generally only available to those that have owned their car for a certain number of months.
When you take out a return to value gap insurance policy the insurer will get an assessment of the current market value of your car from an independent third party. This is the most you will be able to claim for your vehicle on the policy.
For example, say you buy a car for £20,000. You then take out a policy 5 months later when your car is valued at £15,000. One year on from that you write your car off and receive £9,000 from your car insurance company (its market value at the time): your RTV gap insurance policy would pay out the £6,000 difference.
How can I find the best gap insurance quote?
First of all you need to decide if you need gap insurance and if so, what type: return to invoice, vehicle replacement, or return to value? Once you've decided this there are a number of features that you need to look out for when you're comparing your options to ensure you get the right deal:
- Excess: Does the policy contribute to the excess due on your car insurance policy? If so, how much?
- Maximum cover: How much cover you want. Most insurers limit this to £25,000 but it does vary.
- Maximum value: Some insurers will limit the maximum cost of car they'll cover. Others offer specific policies to cars worth less than a set value (when new).
- Period of cover: Gap insurers generally offer policies that will run for between 1 and 5 years; most cars at least halve in value within 3 years.
- Age of car: Some insurers only cover brand new cars, while others offer cover for vehicles up to 10 years old. Similarly some policies will only be available to those with brand new cars, and some with older models.
- Mileage limits: Some providers will only insure cars with mileages below a certain threshold, while others limit your mileage after taking out a policy.
If you decide the level of cover you want from the features listed above and compare gap insurance quotes for policies that offer suitable protection, you'll be able to find cheap gap insurance that won't leave you high and dry if something does happen to your car.