This article will explore gap motor insurance. We’ll look at the features of gap insurance policies and explain what this specialist insurance is designed to cover. We’ll explain who could stand to benefit the most from gap insurance, and what factors play into whether a gap insurance policy is a smart use of your money.
What is gap insurance?
Let’s start with the basics: what is gap insurance?
A gap insurance policy is an insurance cover that is designed to work with a standard comprehensive car insurance policy.
If your vehicle is written off in the event of an accident, theft or otherwise, a comprehensive vehicle policy will only reimburse you for the current market value of the car. Let’s break that down:
Current – A valuation based upon the age and condition of the vehicle at the time of the loss
Market value – A valuation based upon what another member of the public would be prepared to pay.
A gap insurance policy steps in and will pay you the difference between the cost of a brand-new replacement, and the amount paid by your comprehensive cover.
As a simple example. Jenny buys a car for £20,000 and three years later, she is involved in a road traffic accident and the car is written off. Her insurer will assess the value of the car and provide compensation for the value of the three-year-old motors, which might be as little as £10,000.
Her gap insurance cover would then top that up by a further £10,000 bringing her total claims to £20,000 – enough to buy a replacement car of the same standard.
Why do people use gap insurance?
It’s important to clarify that under a standard insurance policy, the practice of paying the current market value means your insurer will not pay you for:
- The amount you originally paid for your car; nor
- The amount you would need to pay to replace your car with a brand-new model
Why is this valuation policy an issue for motorists?
It can particularly annoy people in the following situations:
1. Writing off a newly-new vehicle
Whether or not you secure a great deal on the purchase price of a new car, it is likely that its market value will drop considerably as you drive it off the forecourt.
Consider what would a dealership be prepared to pay you to immediately buy the car back from you a day later? That answer is unlikely to be anything greater than 90% of what you paid for it – they need to make a profit margin after all.
I invite you to look on the website of your car manufacturer and enter the details of a virtually new car in their ‘value your car for part exchange’ calculator to find out how of a discount they would expect to receive.
This puts drivers of a brand new motor in a vulnerable position. If their vehicle cost £30,000 two months ago, and it’s stolen, a comprehensive insurance policy may pay the owner as little as £27,000 for the vehicle.
It’s logical that the unfortunate car owner would want to use that money to buy a new car again. After all, it’s unlikely that many two-month-old examples are even available for sale.
Yet they’ll need to stump up a staggering sum to offset the high depreciation of the first month of use.
2. Being paid less than the finance outstanding on the vehicle
The steep depreciation of new vehicles can also catch out anyone who has bought a vehicle with finance.
If you pay for the vehicle with a flat monthly payment over 48 months, you’ll still have 46/48 of the loan payable after two months (96%).
But if your insurer only pays you 90% of the purchase price of the car in the example above, you’ll be unable to fully pay off the loan with the insurance payout. This could leave you carless, and yet with an amount owing to the finance company.
3. Poor replacement options after your vehicle has racked up the miles
As cars get older, their market values approach small change. Your car might have picked up wear-and-tear, the occasional technical issue and falts but you know and love the vehicle.
If the worst was to happen to your vehicle, and you received a small sum representing the market value of the car, you’d have to go shopping around with very little in the used car market. You might not like what you find. Falts or damage aren’t quite as endearing when they’re on a car you’re thinking of purchasing.
Gap insurance could solve all of these problems by ensuring you have enough cash after a claim to start the process again by buying a brand new car – ordered to your specifications.
Who could benefit the most from gap insurance?
Buyers of brand-new vehicles that experience high depreciation in their first few years will stand to gain the most from a gap insurance policy.
It’s in the first few years that the gap between what you feel the car is worth, and what an insurer would be prepared to reimburse you is at its greatest. Gap insurance helps to correct this imbalance and avoid an injustice if your new purchase becomes the victim of an accident or crime soon after you acquired it.
If you own a car with more miles on the clock, the £ difference between the current market value and the original purchase price will have increased to a sizeable sum. At this stage, a claim could run into the £10,000s which would make a huge difference in adjusting to the disappointment of losing your car.
Finally, owners who bought a brand-new car through finance with a low deposit are most at risk of owing more on a vehicle loan than an insurer would be prepared to cough up. If you are stretched financially, and you don’t think you would be able to afford to pay the difference yourself to exit the loan, then gap insurance is worth considering.
Of course, balancing all this is the fact that gap insurance is an additional insurance policy that will increase the overall cost of insuring your car. Similar to life insurance, and other forms of insurance, you’ll need to pay a monthly or annual premium.
It’s important that you shop around to ensure that you’re getting a good deal on your insurance. Accepting gap insurance provided by car dealerships is unlikely to be a wise choice. Dealer add-ons such as gap insurance are generally high-margin products that assure the dealer of a decent commission payment in return for referring a new customer to the insurance company. That commission is ultimately being paid for by your monthly premiums. The 2015 intervention by the FCA into the gap insurance market has, in the words of the FCA, had a ‘positive’ impact on the industry by decreasing the number of policies sold to those who do not need or want such a policy.