Gap insurance

The minute a new car drives off the garage forecourt, it will depreciate in value.

Depreciation is defined as the difference between the amount you paid for the car and the amount you get back when you trade or sell it.

If your car is declared a total loss, your insurer typically offers you the current market value of the car. In most cases, due to depreciation, this can be much lower than the price you originally paid – and less than the balance you owe on finance.

Gap insurance covers the difference in price, which, depending on your level of cover, will cover your outstanding finance or allow you to replace your car without having to find additional funds.

The amount your car will depreciate depends on lots of things – the make and model, how old it is, how many miles its done, and the condition it’s in. As a general rule, a new car depreciates at roughly 20% a year.

For example, if you purchased a car for £20,000, by year three it’ll be worth about £10,000 at market value. That’s nearly a 50% drop overall!

If your car is declared a total loss, then your insurer will only pay out the market valuation of £10,000. It’s unlikely that this'll be enough to buy a newer equivalent model, leaving you to fork out for the £10,000 shortfall or settle for an older car.

If you’d taken out gap insurance when you’d first bought your car, you’d get £20,000 (£10,000 from your insurance policy and £10,000 from the gap cover)*. This would mean you’d be able to get a new replacement without having to dip into your own pocket.

*Return to invoice or vehicle replacement policies only

In order to qualify for gap insurance, the age, mileage and price of the car must fall within a certain range and the car must feature in Glass’s Guide.

Most gap insurance cannot insure:

• Cars with a purchase price of over £75,000 (unless they have an approved tracking device)
• Vehicles over 10 years old
• Vehicles that have driven more than 100,000 miles when the policy is purchased.

You should also note that gap insurance does not cover taxis, private hire vehicles, cars and vans used for any other type of ‘hire and reward’, or vehicles used for racing, rallying or any other competitive event.

Gap insurance is an additional cost, so it’s important to understand it and decide on whether you really need it.

If your car is declared a total loss, your car insurance policy should mean you can replace it with another car that’s a similar age and in the same condition. So if you don’t want a newer car to replace your old one and you’re happy getting a car of similar age and value, then a gap insurance policy may not be for you.

If you bought your car with cash and you can afford to cover the difference between your previous car and a new car out of your own funds, then you probably won’t need gap insurance.

Gap insurance becomes useful if you want to replace your car with a new car, or if you bought a car on finance. This is because your pay-out may not be enough to clear the debt, so you will not have a car and you will still be stuck paying off the finance.

There are several different types of policy available, depending on how old the car is, and where and when you bought it. Deciding on the policy to suit you, depends on how you bought the vehicle (cash or finance) and how long you’ve owned the vehicle.

The different policy types are:

1. Vehicle replacement gap insurance covers the difference between the insurance pay-out and the cost of replacing your car to the same specification as when it was purchased.

2. Return to invoice (RTI) pays the difference between the insurance payout and the original value of the car when you bought it.

It ensures that if your car is declared a total loss, the difference between your insurer’s payment and the cost of your vehicle when you bought it is covered, including any outstanding finance.

3. Finance, Lease & Contract Hire gap insurance protects you in the event of your vehicle being declared a total loss. It is suitable for HP, PCP, Lease and Contract Hire Vehicles.

This type of gap insurance will pay the difference between the outstanding finance balance and the motor insurer's settlement.

We understand that buying gap insurance can be confusing. We've partnered with Direct Gap to help you find the gap insurance you need.

With Direct Gap you get:

• No fees for paying by credit card – monthly payments are available over 12 instalments (subject to status)
• A quick resolution - they aim to settle any claim within 10 days
• No charge for amending your policy with new registration number or address details
• Cover for all named drivers on your policy