Gap insurance is a type of insurance typically purchased for a vehicle that pays the difference between the actual cash value of a vehicle and the amount you paid for the vehicle, or the amount still owed on the car loan or lease in the event of a total loss. This can be important if the vehicle is stolen or written off in an accident and the insurance pay out from the primary car insurance policy is less than the amount you paid for the vehicle, or the amount still owed on the loan or lease. Gap insurance is typically offered by the dealership or lender when a vehicle is purchased or leased, but it can also be purchased separately and is often much cheaper.
GAP is an acronym for Guaranteed Asset Protection
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How does Gap Insurance work?
Gap insurance works by covering the difference, or “gap,” between the actual cash value of a vehicle and the amount you paid for the vehicle, or the amount still owed on the car loan or lease in the event of a total loss.
Here is an example to illustrate how gap insurance works:
Imagine you purchase a new car for £25,000 and you pay £5,000 as a deposit. You finance the remaining £20,000 through a car loan. A year later, you are involved in an accident and your car is deemed a total loss. The insurance company assesses the value of the car and determines that its actual cash value is £15,000. However, you paid £20,000 for the car and would like to replace with a car of the same value.. In this case, gap insurance would cover the remaining £5,000 (£15,000 – £20,000).
It is worth noting that Gap insurance cover is typically only available for new cars, the cover is usually available for 12 months to 5 years.
Should I buy Gap Insurance?
Whether or not to buy gap insurance is a personal decision that depends on your individual circumstances. Here are a few factors to consider when deciding whether to purchase gap insurance:
- Loan or lease term: The longer the loan or lease term, the greater the chance that the gap will widen between the actual cash value of the vehicle and the amount still owed on the loan or lease. If you have a long-term loan or lease, gap insurance may be a good idea.
- Vehicle value: The rate of depreciation for vehicles can vary greatly depending on the make, model, and year. If you have a vehicle that depreciates quickly, gap insurance may be a good idea.
- Risk tolerance: If you are comfortable with the risk of owing more on your car loan or lease than the car is worth, you may not need gap insurance. However, if you are uncomfortable with this risk, gap insurance can provide peace of mind.
- Your personal financial situation: You should take into account your personal financial situation, if you can afford the difference between the actual cash value of the vehicle and the amount still owed on the loan or lease in the event of a total loss, Gap insurance may not be necessary.
When wouldn’t I need Gap Insurance?
You may not need gap insurance in the following situations:
- If you are able to cover the difference out of pocket: If you are comfortable with the risk of owing more on your car loan or lease than the car is worth, and you have the financial means to cover the difference out of pocket, you may not need gap insurance.
- If you are close to the end of your car loan or lease term: If you are close to the end of your car loan or lease term, gap insurance may not be necessary as the gap between the actual cash value of the vehicle and the amount still owed on the loan or lease will be small.
It’s important to note that gap insurance can provide peace of mind and cover for the “gap” in case of an accident and total loss. If you are uncertain about whether or not you need gap insurance, please call us and we’d be happy to answer any questions to help you make an informed decision.
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What are the different types of Gap Insurance?
There are a few different types of gap insurance that are available, each with its own specific cover and benefits. The most common types of gap insurance include:
- Return to Invoice Gap Insurance: This type of gap insurance covers the difference between the actual cash value of a vehicle and the original invoice price of the vehicle in the event of a total loss. This can be helpful if you purchased a vehicle that has depreciated quickly and you would like to get the same make and model again.
- Vehicle Replacement Gap Insurance: This type of gap insurance covers the difference between the actual cash value of a vehicle and the cost of a new vehicle of the same make and model in the event of a total loss. This can be useful if you want to replace your vehicle with a new one after a total loss.
- Lease/Loan Gap Insurance: It covers the difference between the actual cash value of a vehicle and the amount still owed on the car loan or lease in the event of a total loss.
Are there any exclusions with GAP insurance?
Yes, there are exclusions with gap insurance, like any other insurance policy. These exclusions vary depending on the specific gap insurance policy and the insurer, but some common exclusions include:
- Wear and tear: Gap insurance typically does not cover damage caused by normal wear and tear on the vehicle.
- Maintenance issues: Gap insurance typically does not cover damage caused by lack of maintenance or mechanical failure.
- Theft: Some gap insurance policies may not cover the gap if the vehicle is stolen, but it’s always worth checking with your insurer.
- Misuse of vehicle: Some gap insurance policies may not cover the gap if the vehicle was used for racing or other prohibited activities.
- Accidents caused by the policyholder: Some gap insurance policies may not cover the gap if the policyholder is found to be at fault in an accident.
- Accidents not covered by primary insurance: If the primary insurance policy does not cover the accident, gap insurance will not cover the gap either.
- Exclusions based on vehicle type: Some gap insurance policies may not cover certain types of vehicles, such as commercial vehicles or motorcycles.
It’s important to read the policy’s fine print and understand the cover limits and exclusions of your gap insurance policy, so you know what is covered and what is not. You should also check with your insurance agent or lender to clarify any questions you may have about your policy’s exclusions.
What is Return to Invoice and finance
Return to invoice (RTI) and return to finance (RTF) gap insurance are types of gap insurance that are designed to cover the gap between the actual cash value of a vehicle and the original invoice price or the original finance amount in the event of a total loss. Combined RTI and RTF policies are also available.
Return to Invoice Gap Insurance (RTI): This type of gap insurance covers the difference between the actual cash value of a vehicle and the original invoice price of the vehicle in the event of a total loss. This can be helpful if you purchased a vehicle that has depreciated quickly and you would like to get the same make and model again. In case of a total loss, RTI will pay the difference between the actual cash value of the vehicle and the original invoice price of the vehicle, this way the policyholder will be able to purchase a new vehicle of the same make and model.
What is Vehicle Replacement and finance
Vehicle Replacement Gap Insurance (VRG) and Return to Finance Gap Insurance (RTF) are two different types of gap insurance, each with its own specific cover and benefits.
Vehicle Replacement Gap Insurance (VRG): This type of gap insurance covers the difference between the actual cash value of a vehicle and the cost of a new vehicle of the same make and model in the event of a total loss. This can be useful if you want to replace your vehicle with a new one after a total loss. In case of a total loss, VRG will pay the difference between the actual cash value of the vehicle and the cost of a new vehicle of the same make and model, this way the policyholder will be able to replace their vehicle.
What is Contract hire and lease Gap insurance?
Contract hire and lease gap insurance, also known as lease/loan gap insurance, is a type of gap insurance that is specifically designed for individuals or businesses who are leasing or financing a vehicle through a contract hire or lease agreement. It covers the gap between the actual cash value of a vehicle and the amount still owed on the contract hire or lease agreement in the event of a total loss.
In a contract hire or lease, the insurance payout from the primary car insurance policy may be less than the amount still owed on the contract hire or lease agreement. This can happen if the vehicle is stolen or written off in an accident, and the actual cash value of the vehicle is less than the amount still owed on the contract hire or lease agreement.
For example, if you lease a car for a 3-year period, pay an initial deposit and then make monthly payments, in case of a total loss of the car, the insurance pay out may be less than the total amount still owed on the lease. In this case, contract hire and lease gap insurance will cover the difference between the insurance pay out and the amount still owed on the contract hire or lease agreement.
It’s worth noting that contract hire, and lease gap insurance is typically offered by the dealership or lender when a vehicle is purchased or leased, but it can also be purchased separately. It’s always good to check with your insurance agent or lender to understand the cover limits and exclusions of your contract hire and lease gap insurance policy so you know what is covered and what is not.