Everyone is aware of what insurance is whether it be home insurance, travel insurance, car insurance or even life insurance but many have not considered what Gap Insurance is and whether they would need it in case of a claim.
What is Gap Insurance?
It is a well known fact that the value of a brand new car drops by 1/3 as soon as it is driven off the forecourt and according to the AA the value of a car will have fallen by an average of 60% by year 3. When a car is written off, or stolen, insurers will pay you the value of the car at that time, so your likely to receive significantly less than the cost to replace, creating a “gap”.
This is especially a problem when a car is only new when an accident or theft happens and this is where Gap (Gauranteed asset protection) insurance comes in to pay. This will cover the “gap” and is usually sold by dealerships however there are stand alone providers such as Mercedes Gap Insurance. Policies are typically priced between £100 – £300 for three years of cover.
What does gap insurance cover?
There are three types of gap insurance and cover will depend on the type you buy.
“Contract hire’ gap insurance” is only available to people who lease their car and have no option to buy it. It means that the current market value of the car will be covered by the insurance and gap cover will cover any payments owing on a lease.
“Back to invoice gap insurance” covers the difference between the insurer pay out and the original amount you paid for the car or what you currently owe to the finance company.
“Vehicle replacement gap insurance” will pay the difference between the insurer pay out and what it would cost to purchase a brand new car today, or if the car was used how much you originally purchased for.
Is it worth purchasing Gap Insurance?
The short answer is, yes! The average cost of a new car in the UK is £38,585.00. When you consider the value drops by 1/3 as soon as you leave the forecourt, the average gap could be as much as £12,861. A policy costing £300.00 has the potential to save you an out of pocket gap of £12,561.00. Each policy is optional and so it is worth considering the value it could hold for you. It would be particularly useful to you if you would want a brand new replacement car or you owe money to a finance company from the purchase of the car. Should your car be written off or stolen during the first three years of ownership then you could be lest with a significant bill to replace the car like for like or to repay what is owed to a finance company, and gap insurance would help with that.
Gap insurance is less useful if you’d be happy with a replacement that isn’t brand new, your car is less than 1 year old and you have full comprehensive insurance or you have a used car as often the insurance will mean there is little, or no gap.