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What is GAP or car depreciation insurance?

Close up shot of blue mini headlampWhy would I need GAP or car depreciation insurance?

You may have heard of it, you may even have signed up for it, but do you really know about car depreciation insurance, otherwise known as GAP or guaranteed asset protection insurance? 

The truth is GAP insurance could save you money, so follow Confused.com’s guide to why you might need it and when you should buy it.

What is car depreciation insurance?

Car depreciation provides essential protection against car depreciation...think of it as valuable top-up to your motor insurance. Comprehensive car insurance policies pay out if your car is written off or stolen. However, the figure your insurance company will use to determine how much they pay is based on the current market value of your car on the date of loss, and not what the car was originally worth. Car depreciation insurance will pay this shortfall, making sure you're not out of pocket should you make a claim.

Car depreciation insurance is calculated using respected trade publication, Glass’s Guide. Insurance companies also use this to value vehicles, so both parties (car insurer and GAP insurer) are reading from the same sheet when valuing the vehicle and calculating its depreciation.

There's a policy to suit every car driver, whether the vehicle is owned outright, still under finance, leased or contract hired. Furthermore, it doesn't matter whether the car is new, nearly new, or a number of years old.

Types of car depreciation insurance

Return to value insurance

This is the simplest (and some would argue, most valuable) of the car depreciation insurance range as it’s suitable for new or used cars purchased privately or from a dealer using cash or finance. Usually there is no restriction on how long you have owned the vehicle.

Return to value insurance pays the difference between your motor insurer’s settlement if your car is a total loss and the value of your car according to Glass’s Guide when you bought the policy. It simply pays the amount you lost in depreciation if your car is a total loss.

Return to invoice

RTI  insurance makes up the difference between the original purchase price of the vehicle and the amount paid by your car insurance in the event of total loss if your car is stolen or damaged beyond repair.

To qualify, you would typically need to have purchased your new or used car from a motor dealer within 90 days of buying the policy.

Example:

  • You paid £15,000 for your new or second-hand car
  • Your car is later involved in an accident or stolen and your comprehensive insurance pays you £11,500 (current market value)
  • RTI GAP insurance will pay the difference of £3,500 so you are returned the total original value of £15,000

Finance shortfall

Finance shortfall insurance pays the difference between any outstanding finance on the vehicle and the insurer's valuation if your car is stolen or damaged beyond repair.

To qualify for finance shortfall insurance, you would typically need to have purchased your new or used car from a motor dealer using dealer provided hire-purchase/motor loan within 90 days of buying the policy.

Example:

  • You paid £15,000 for a car and at time of loss your motor insurance settlement is £11,500
  • Your early settlement figure on the loan is £16,700
  • our total finance gap insurance settlement would be £5,200

Vehicle replacement

Vehicle replacement (also known as new car replacement GAP or VRI) is intended to pay the difference between your motor insurer’s total loss settlement and the cost of a brand new replacement vehicle, taking into account the additional sum if the manufacturer has increased the vehicle cost since the start of the policy.

To qualify, most car depreciation insurance providers require the car to be new at the start of the policy and you to be the first keeper. Watch out though, some GAP insurers call a policy VRI/Vehicle Replacement but will only return you the invoice price. A quick look at the terms (rather than the advert) will tell you what you need to know. If you see something like, “…by which the purchase price exceeds the motor insurer’s settlement”, then you’re not going to get a new car. It’s Return to Invoice… but at a higher price!

Example:

  • You paid £15,000 for your car and at time of loss your motor insurance settlement is £11,500
  • The list price for the same car has increased to £17,000
  • VRI GAP insurance will pay the difference of £5,500 so you are returned the cost of a brand new vehicle

The pros of car depreciation insurance

Peace of mind: Knowing that, should the worst happen and your car’s stolen or damaged beyond repair, you won’t be out of pocket.

Less hassle: You won’t have to spend time and effort negotiating with your car insurance company over the value of your (ex) car – the gap insurer should take care of this.

The cons of car depreciation insurance

Cost: There’s always a risk you could end up paying for car depreciation insurance that you’ll never use. However the cost of a three year policy is normally less than the average car’s depreciation amount in a month.

Car Depreciation Insurance Glossary

The following list is designed to help you understand some of the more commonly used terms associated with Car Depreciation insurance and to help you choose the most appropriate type of policy from the choices available.

Comprehensive Motor Insurance

A valid and in-force comprehensive motor insurance policy that covers the vehicle against theft, fire or accident.

Date of Loss

The date of the theft, fire or accident that gives rise to your claim for the total loss of the vehicle.

Finance Agreement

An enforceable hire purchase finance agreement entered into by you with an authorised finance company for the purchase of the vehicle (not a personal loan).

Glass’s Guide

In order to calculate your claim, both your motor insurer and the GAP insurer must establish an accurate value of your vehicle at the start of the policy and at the point of total loss. Most motor insurers refer to Glass's valuation service, the industry’s leading vehicle valuation guide for over 75 years, for independent third party valuations.

Inception Date

The date from which a policy is valid.

Invoice Price

The cost of the vehicle inclusive of VAT where applicable, less any discount, including factory fitted accessories, but usually excluding warranty charges, insurance premiums, road fund licence, and dealer fitted extras as shown on the invoice for the vehicle provided by an entity registered for VAT for the purpose of providing motor vehicles, or the retail value at time of purchase of the vehicle as determined by Glass’s Guide, whichever is lower.

Market Value

The value of the vehicle at date of loss based on Glass’s Guide value for purchasing or replacing the vehicle with one of the same make, model, trim level, book mileage and overall condition.

Negative Equity

Any amount that the finance agreement exceeds the Invoice Price or is carried over from a previous finance agreement.

Total Loss

Where it is unsafe to repair the vehicle, the cost of repair is greater than the pre-accident value, or the vehicle has been stolen and not recovered, and a total loss payment has been made by the motor insurer.

Vehicle Value

Glass’s Guide value for a vehicle of the same make, model specification level, age, book mileage and overall condition at the start of the policy.