Gap insurance – do you need it?
How it covers your car & what to watch out for
Gap insurance, often flogged by pushy car salesmen, covers the difference between the amount you paid for your car and the amount an insurance company would give you if it was written off or stolen.
This guide explains the basics of gap, or guaranteed asset protection insurance to give it its formal name, to help you decide if you need it, how it works and what to watch out for if you're thinking about buying it.
In this guide...
This is the first incarnation of this guide. Please tell us your experiences in the gap insurance discussion.
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What is gap insurance?
It's a sad fact of life that if you buy a brand new car, its value drops by a third as soon as you drive it off the forecourt, and will fall by 40% in the first year and up to 60% over three years on average, according to the AA.
If the car is written off or stolen, your insurer will pay out what it's worth at the time – likely to be less than what you paid when you bought it, especially if it's brand new. This means when you're getting a replacement car there's a 'gap' between the amount your insurer pays and the amount you originally paid.
If you choose to buy gap insurance, this is the 'gap' it covers. Dealerships usually sell it and policies are priced between £100 and £300 for three years' worth of cover. However, gap insurance needs to be taken with a large pinch of salt. This is because:
Gap insurance isn't essential as your car insurer should ALREADY pay out for a replacement car. And if the car is less than 12 months old, it will be a brand spanking new car.
The reason gap insurance exists
But before we go into the pros and cons it's worth looking at one of the main reasons gap insurance exists and why people buy and it is because cars lose their value – depreciate – quickly, especially if they're new. Depreciation is the difference between what you paid for your car and the amount it's now worth.
How much a car depreciates depends on lots of things such as the model of car, how old it is, how many miles it's covered and the condition it's in. Here's an example...
A Citroen C-Zero – one of the worst cars for depreciation – costs £26,160 new. After three years it'll only be worth £4,950 – 18.9% of its original value.
The following tables give some indication of the best and worst cars when it comes to depreciation.
The five cars that depreciate most over three years
CAR MODEL AVERAGE PRICE NEW AVERAGE % OF THE NEW PRICE RETAINED VALUE AFTER THREE YEARS Citroen C-Zero (2011-) £26,160 18.9% £4,950 Peugeot ION (2011-) £26,160 18.9% £4,950 MG Motor UK MG6 (2011-) £19,630 26.8% £5,250 Chevrolet Cruze (2012-2015) £19,180 28.8% £5,520 Aixam Crossline (2009-) £12,060 28.9% £3,480
Note: Based on 12,000 miles per year. Source: Automotive data analysts CAP. November 2015.
The five cars that depreciate least over three years
CAR MODEL AVERAGE PRICE NEW AVERAGE % OF THE NEW PRICE RETAINED VALUE AFTER THREE YEARS Mercedes-Benz SLS ('11-) £175,840 68.9% £121,100 Porsche Boxster (2012-) £42,448 65.0% £27,580 Audi Q5 (2012-) £35,840 64.1% £22,970 Lamborghini Aventador (2011-) £256,020 64.0% £163,900 Ferrari 458 (2010-) £172,130 63.8% £109,800
Note: Based on 12,000 miles per year. Source: Automotive data analysts CAP. November 2015.
If cars lose most of their value in the first year, is gap insurance just for new cars?
No, you can buy it with new or used cars THOUGH it's a lot more useful with new cars. This is because new cars depreciate at a much faster rate.
As the value will already be lower with a used car and the depreciation process having slowed, the gap it covers between the price you paid and what your insurer will pay out is a lot less and therefore with a used-car gap insurance is often worthless.
There are several different types of gap insurance but the three most common are:
'Back to invoice' gap insurance. This kind of cover pays you the difference between what your car insurer will pay out in the event of your car being written off or stolen and either the original amount you paid for it or the amount you owe to a car finance company.
'Vehicle replacement' gap insurance. This cover pays you the difference between what the insurer will pay you and what you would pay if you bought the car today brand new, or if it was a used car, how much it was when you originally bought it.
'Contract hire' gap insurance. This type of insurance is only available for those who have a leased car where there is no option to buy the car. The current market value of the car will be covered by your car insurer and the gap cover will pay any remaining payments owed for the remainder of the lease.
Like all insurance policies, there are a number of things providers will not pay out for. Here are the most common:
- It will only pay out if you have fully comprehensive car insurance (so it's not suitable if you've got third-party only or third-party fire and theft – see Cheap Car Insurance for more information).
- It will only pay out if your car is stolen or a total write-off, as judged by the insurance company.
- It won't pay you for any deductions made by your car insurance company. For example, if it lowers the sum it pays you because you've missed a payment the gap insurance policy won't cover this.
- If you've added extras to your car, such as alloys or spoilers, gap insurance won't cover the cost of these if your car is lost or stolen. It will only pay out the gap between what you originally paid and the market value (minus the extras).
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Should I get gap insurance?
We've already talked about what gap insurance is so the question now is should you buy it? As we've explained it's not essential because your car insurance should pay out for a replacement car of the same age and condition as yours was when it was written off so you're not any worse off.
There are lots of other reasons you should perhaps give it a wide berth, including it only paying out if you have a fully comprehensive car insurance policy, and the fact it has a shoddy reputation because it's been pushed hard onto unsuspecting consumers for years, although since September this has changed (see the full list of new rules).
Remember – there are lots of limitations to wade through and reasons why it might not pay out. To fully understand it we've listed some of the main pros and cons here...
You'd be happy with a replacement (not a brand-spanking new) car
If you aren't bothered by your car's depreciation then there's not a lot of point in buying gap insurance. Your car insurance will pay out for a replacement car so you'll get a car that is like-for-like for what you had when it was written off or stolen (see our Cheap Car Insurance guide for tips on getting a cheap policy), so the only benefit of gap is that you'll get back the original amount you paid.
Your car's less than one year old and you have fully comprehensive car insurance
Most fully comprehensive car insurance policies offer ‘new car replacement’ during the first 12 and sometimes even 24 months for new cars, so if yours does and you're still in this period you won't need gap insurance.
You have a used car (although some with used cars do still buy it)
If you bought a used car like the 9.7 million people who did in 2014 (compared to just 2.5 million splashing out on a new car, according to the British Car Auctions), gap insurance isn't as useful. This is because a used car won't fall in value at the same rate as a new car.
On average, according to CAP, a three-year-old car's value will drop 14% in the first year, 24% in the second and 33% in the third year. This is significantly less than the 60% average fall for new cars in the first three years.
Therefore the gap between what you paid and what the insurer will pay you will be far smaller and the gap policy could be more or less useless.
You want a brand new car
If you're dead set on getting a brand spanking new car if yours is written off you could consider gap insurance. For example, if you pay £30,000 for a new car and 15 months later it's written off your car insurer will pay out £18,000 (what it's worth at the time).
If you're not happy with the lower amount – even though that's enough to provide you with a like-for-like replacement car – gap insurance may be worth it.
You owe money to a car finance company
If you have taken out finance to buy the car – eg, a personal loan – you may find gap insurance useful. This is because if you've bought a car this way and it's written off or stolen, although your car insurer will pay out the value it's worth at the time, you're still left paying off the value it was when you first bought it.
Now if you crash the car or not, you're still going to have to pay back the loan. But if you had bought gap cover the loan would be paid off earlier so you wouldn't be left paying back the money for a car you no longer have or a car you're not able to drive if, for example, you crashed your car and now won't drive again.
The cheapest way to buy gap insurance
Gap insurance is available in a number of different places and usually sold by dealerships or specialist brokers (it's unlikely you'll be able to get it from your car insurer). But it's important to note:
Don't just get your dealer's cover, it might be cheaper to buy from an online provider.
Buying from the dealers is often the expensive option, as many of our users have reported in our forum.
I purchased a nearly new car from a reputable dealer. They offered me gap insurance for £349 for three years yet similar cover is £63 online.
- Forumite Sladevalley
Last gap policy I bought online was 75% cheaper than that offered by the dealer, so definitely worth it...
- Forumite WellKnownSid
We tested it out and contacted 10 dealers for a gap insurance quote for a car worth £10,000. Only three of the dealers were prepared to give us a quote and the ones we got were all more expensive than what were available online.
For example, the cheapest quotes we've got from a dealer for one-year and three-years' worth of cover were £325 and £375 respectively. When we searched online we've got the same cover for £54 and £120 respectively.
Therefore here we've focused on using online brokers and insurers to get your best price.
The price you get is dependent on lots of factors so if you've time always check a few different sites before buying to make sure you're getting the best price. Going via a broker also means you can get additional information and advice on the policy you're buying.
Some of the most popular include ALA* (see below how to get a 25% discount), Click4Gap*, EasyGap and GapInsurance123. If you've had a good experience with these or a company we've not mentioned please let us know.
Once you've got a range of quotes from some online brokers, it's worth approaching specialist gap insurers directly to see if you can beat the price.
While many promise you the best price, check the following provider using the link below to take advantage of special deals.
Use this special MSE Blagged ALA Gap Insurance* link and get 25% off the standard price, when you use the code MSE25. Simply buy by Monday 31 December, remembering to enter the exclusive blagged code, and it will reduce the premium.
NOTE – Limited feedback
We have very little feedback to share so let us know your experiences and how you get on in the forum discussion.
Once you've checked the prices with online brokers, specialist insurers and dealers (although the latter is unlikely to offer the best deal), you should have a shortlist of your best quotes. Whatever policy you choose, first make sure you know all the key features and make sure it's right for you. Then once you're 100% sure it's right for you, check you've found your best price.
There are strict rules around selling gap insurance
As the selling of gap insurance was historically done by pushy car salesmen, to tackle this the Financial Conduct Authority (FCA) brought in new rules on 1 September 2015 for those selling it. Dealers selling gap insurance are now NOT allowed to sell it at the same time as you buy a car.
There needs to be at least two days between the date you are given the cost (with details of the policy cover) and the day you buy the gap insurance. This is to allow people have time to check the prices elsewhere and aren't bullied into buying at the dealers (although MSE Jo asked for car finance quotes from a dealer and they included gap insurance so be warned). However, you - the consumer - can initiate the purchase that day after receiving the cost breakdown and policy details.
If you think your dealer hasn't abided by the FCA's rules, you can complain directly to the free Financial Ombudsman.
What to do if something goes wrong
If your gap insurer rejects your claim and you think it has done so wrongly, don't take it lying down. First complain to it directly then if you don't get a response within eight weeks, complain to the free Financial Ombudsman.
The Ombudsman is an independent adjudicator that will make the final decision on a claim if you are locked in a dispute with your insurer. For more on how to make a complaint, read our Financial Rights guide.