GAP insurance explained

kim jones
Kim Jones
Updated 20 October 2022  | 3 mins read

We’ve all heard the saying that, as soon as you drive a new vehicle off the forecourt, it drops in value.

But it might surprise you just how much your can, van, motorbike or motorhome depreciates in the first few years.

The average new car (doing 10,000 miles per year) may lose as much as 40% of its value by the end of the first year, and it could rise to a staggering 60% after three years.

With these statistics in mind, it’s important to be aware that, were you to lose your new vehicle in a write-off, or if it were stolen, your insurance provider would normally only reimburse you for its market value at the time of the incident.

That wouldn’t be enough to buy the same vehicle, new. It may also not be enough to pay any remaining finance you have on the motor.

That’s where GAP insurance (Guaranteed Asset Protection) can step in to cover the shortfall.

It will provide you with the extra money you’d need to buy a new replacement vehicle or to pay off any outstanding finance you owe on it.

What is GAP insurance?

GAP insurance is a type of motor insurance sold as an optional extra.

It makes up the difference between what an insurance company offers you if your vehicle is written off or stolen and what you originally paid for it (or how much finance you still owe on it.)

It means you could afford to buy a new vehicle to replace your old one, or pay off what you owe on your finance deal, so you don’t have to continue forking out for a motor you no longer have.

So if you bought your vehicle for £20,000 and it was written off three years later (when its value had depreciated by 60%), you’d get just an £8,000 payout offer from your insurer (minus your excess). But with GAP insurance you’d also get the £12,000 shortfall, meaning, with a total of £20,000 reimbursed, you could afford to replace your vehicle as new.

When do I need GAP insurance?

As we now know, if your car, van, motorbike or motorhome  is written off, or stolen, your insurer will pay out the cost of your car’s current market value.

This means you’ll be able to replace your vehicle with one of a similar age and condition to the one you lost.

However, if it’s important to you that you could buy a brand-new replacement motor, then GAP insurance can help you do that.

It’s also useful if you bought your wheels on finance.

In these circumstances, if your vehicle got written off or stolen, although motor insurance would pay out for what it’s worth at the time of the incident, you could still be left with outstanding payments to make on a motor you no longer have. With GAP insurance in place, the loan would be paid off.

You may also want to think about GAP insurance if your vehicle is on a long-term lease as a written off vehicle would mean no transport and a huge bill to pay off.

When is GAP insurance unnecessary?

There are circumstances, though, when you don’t need GAP insurance. For example:

You may already have new for old cover

Most comprehensive insurance policies offer ‘new for old’ cover as standard for motors less than a year old. This means your insurer will replace your vehicle with a new, like-for-like make and model if yours is written off or stolen.

You aren’t concerned about replacing your vehicle with a brand new one

If that’s the case, then your comprehensive motor insurance policy is enough as it will pay out for the current market value of your motor, so you can replace it with something of a similar specification.

You have a used vehicle that depreciates more slowly

In this case, it probably wouldn’t be worth taking out GAP insurance as the difference between the current value of your motor and what you paid for it is unlikely to be large.

Will GAP insurance replace my vehicle?

GAP policies are designed to provide you with enough funds to buy a new replacement, or to ensure you could clear any outstanding debt if you bought your vehicle on finance.

There are five main types of GAP insurance:

Return to invoice

For vehicles bought from a dealer within the last six months, this pays the gap between what you paid for your vehicle and your motor insurer’s settlement. It could also cover any outstanding finance

Agreed value cover

Designed to take over when return to invoice cover ends, it will pay the difference between your insurer’s valuation at the time your vehicle is written off and the value of the motor when you purchased the policy

Finance GAP insurance

If you bought your vehicle on finance or personal contract hire, this pays out the difference between the amount of outstanding finance and the market value paid out by your insurer. There’ll be no payout if the outstanding finance amount is lower than the market value.

Contract hire GAP

For lease vehicles, this will cover any outstanding rental payments or contract termination fees.

Vehicle replacement

Pays out the difference between the market value and the cost of a near identical replacement vehicle, even if the price has gone up since you bought it

There are some exclusions when it comes to GAP policies.

For example, they won’t pay out:

  • Unless you have fully comprehensive insurance (GAP insurance won’t cover you if you have third party only insurance)
  • If someone else was driving your vehicle without a valid licence or if it was written off due to drink or drug-driving

Where can I buy GAP insurance?

Your car, van, motorbike or motorhome dealer may offer you a GAP insurance policy. But bought from a dealer, these policies can be expensive, so you could be paying more than you need to.

In fact, dealers are not allowed to sell you GAP insurance on the same day that you buy your vehicle, as there legally has to be a two-day cooling-off period. So be sure to do some research before you sign on the dotted line because you could get cheaper cover elsewhere.

You can compare GAP insurance quotes with i-Wonder to find the right policy for your needs.