GAP insurance will only benefit you in certain situations. What are the advantages and disadvantages of GAP insurance?

Make sure that you fully understand what is covered by GAP insurance before deciding if it is the right policy for you.

Is GAP (Guaranteed Auto Protection) Insurance Worth It?

If you have bought a car recently the salesperson probably advised you to purchase GAP insurance, or guaranteed auto protection insurance, along with it. GAP insurance sounds tempting because it protects you against the inevitable depreciation, or loss in value, that occurs when you start driving your new car. But what exactly is GAP insurance? And more to the point, is it worth purchasing?

In this guide:

What is GAP insurance?

GAP insurance makes up the difference between the amount you paid for your car when it was new, and the amount your insurance company would pay you in the event that your car is stolen or written off (irreparably damaged). This difference arises from the fact that a brand new car loses value, or depreciates in value, as soon as you start driving it, and especially after one year and after three years. According to the AA, the value of a new car depreciates by 40% in the first year, and after three years your car will only be worth 40% of what you originally paid for it. However, these values vary a lot depending on what kind of car you have, and the condition that you keep it in.

If your car is stolen or written off your insurer will give you what your car is worth at that time, which will inevitably be less than when you first bought it. This creates a ‘gap’ between the amount you originally paid for your car, and the amount your insurer would pay you. The aptly named GAP insurance, then, acts to fill this ‘gap’ by paying out the difference between what you originally paid, and what your insurance would pay you.

Should I get GAP insurance?

GAP insurance sounds like a good deal when you look at how fast new cars lose their value. However, it is important to remember that this insurance is not essential. Your car insurance company should pay for a replacement in the event of yours being stolen or written off, and this replacement will be in as good a condition as yours was at that time. Therefore, you should carefully consider the advantages and disadvantages of GAP insurance before purchasing.

GAP insurance may be suitable for you if:

  1. You owe more money than the car is worth, and so you risk being in negative equity if your car is stolen or written off. You could owe more money than your car is worth due to: paying a lot of interest, buying a car that depreciates in value particularly quickly, you are paying off debt slowly, or the down payment on your car finance deal was small, for instance 20%.
  2. You signed up to a long-term contract hire arrangement. If you rent your car and it is stolen or written off, you may end up owing the contract hire company more than the insurance company pays you.
  3. You wouldn’t be able to afford to replace your car. If you are worried about your car’s depreciation in value, and that you wouldn’t be able to make up the difference yourself, GAP insurance would be very helpful.

You should avoid GAP insurance if:

  1. You are the first registered owner of your car and it is less than a year old. In this situation, your car insurer should offer a brand new car replacement as part of your policy, and so paying for GAP insurance would be a waste of money.
  2. You are already covered by your finance agreement. Some finance agreements agree to make up the difference between what you paid for the car and its official value when it is stolen or written off. GAP insurance is redundant in this case.
  3. You could cover any shortfall yourself. If you can afford the difference between what your insurance company pay and the cost of a brand new car, there is no point paying for an insurance policy that covers this.

How do I choose the right GAP insurance policy for me?

If you have educated yourself about the advantages and disadvantages of GAP insurance and decided that it is right for you, then make sure you shop around to find the best deal. Just as you should compare car finance deals, it is important to compare GAP insurance deals. You do not need to purchase GAP insurance with your car finance deal - in fact it is often cheaper to go somewhere else.

In addition, you should watch out for exclusions in your GAP insurance policy, as it might not cover as much as you think. For example, it will not cover any amount deducted by your insurance company in cases of unpaid premiums, salvage costs or contributory negligence, nor will it cover any additions to the car after purchase, such as speakers or a satnav.

GAP insurance will only pay you if your insurance is fully comprehensive, your car has been labelled a total write off or unrecoverable, and you have made a successful claim. As such, be sure that this specific scenario is what you want to protect yourself against before purchasing GAP insurance.