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Gap Insurance: How does it work?

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Gap insurance is often completely forgotten about. Buying or renting a brand new car is an exciting, but also expensive, time; whether you pay for it outright or through finance, you’re putting a large investment into the vehicle. Unfortunately, if you have an accident and the car is written off or it’s stolen, your insurance policy wouldn’t pay out the full cost of buying it. This is where Gap insurance can come in useful.

What is Gap Insurance?

If you need to claim on your insurance policy because your car’s written off, they’ll only pay the current market value of the car, not how much you originally paid. New cars can depreciate in value extremely quickly, especially over the first three years. You might pay £12,000 initially, but after three years it could be worth just £6,000. This could leave you seriously worse off, especially if you paid through finance. You’d have no car, but could still be paying for it.

Gap insurance will cover the difference between the insurance payout and the original cost of the vehicle. For example, if there is a £6,000 shortfall between the insurance payment and the original cost, this will be paid by the Gap insurance. This will enable you to pay off any outstanding finance, the balance on a lease or have the funds to buy a new car of a similar standard.

Some dealers offer Gap insurance when you buy the car. However, you can also purchase it separately from a specialist provider. It’s best to look into the deal offered by the garage to see if it includes any lengthy exclusions or payment restrictions. It might be more cost effective to buy your own policy that doesn’t have these limitations.

What types of Gap insurance are available?

Depending on how you paid for the car, there are different types of Gap insurance available.

A Back to Invoice+ Policy is useful if you’ve bought the car through a finance deal. If your vehicle is written off or stolen, they will pay either the difference between the market value and sale price or pay off the outstanding finance, depending on which is the highest amount.

A Vehicle Replacement Insurance+ Policy will enable you to replace the car with one of a similar standard if yours can’t be repaired. This type of policy is of benefit to buyers who purchase the vehicle with a large discount. They’re unlikely to be able to receive the same deal again, but still want a car of the same quality.

With a Contract Hire+ Policy, the insurance provider will pay off the balance of any contract hire agreements if you can no longer use the car.

gap insuranceIs Gap insurance worth it?

As with any insurance, you need to weigh up the pros and cons based on your own situation. With Gap insurance it’s more beneficial to those on finance agreements, especially if:

–          You’ve paid a small deposit

–          Your model depreciates in value quickly

–          You’re paying a high interest rate

–          You’ve spread the finance over a longer term

Restrictions and exclusions will vary by policy and provider, but generally to claim on your policy:

–          You’ll need fully comprehensive insurance

–          Your vehicle must be a write off or unrecoverable

–          Your insurance claim must be successful

Before you take out any policy, it’s best to research the market to find the right deal for you and your vehicle. There are plenty of sites online offering policies to choose from.



About Catherine Stern

About Catherine Stern

Catherine Stern is a freelance writer with a background in marketing and PR. She currently writes web content on a range of subjects, from finance and business to travel and home improvements. As a working single mum of two young boys she understands the pressures that today’s working parents face and the topics they want to read about.

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