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Gap Insurance 101 - The Ultimate Gap Insurance Guide


Confused by Gap Insurance? How does it work? Where can your buy Gap Insurance? What does it do? Do I need it? Over the years, the experts at GapInsurance123 have been asked all kinds of queries on Gap Insurance, and we have compiled what we think may be the most comprehensive guide on the subject available today.

What is more, we offer this ultimate guide free of charge for you. We hope you find the answers you are looking for, but if not then please contact us, and we will do our best to help. Of course, we will be adding to the list of questions over time, and if you have any suggestions that you think we could add then, please feel free to let us know.
 

The Ultimate Guide to Gap InsuranceGap Insurance ultimate guide



1 . What is Gap Insurance?

2.  Why buy Gap Insurance?
3. How does Gap Insurance work?
4. What are the different types of Gap Insurance?
5. When do you need to buy Gap Insurance?
6. Is there tax on Gap Insurance?
7. Do you have to buy Gap Insurance at all?
8. Do you have to buy Gap Insurance from the motor dealer?
9. What does 'Gap' stand for in Gap Insurance?
10. What other names can Gap Insurance be known as?
11. Can Gap Insurance be confused with other types of insurance?
12. What does Gap Insurance not cover?

13. Is it worth getting Gap Insurance on a new car?
14. If you have 'new for old' then is there no need for Gap Insurance then?
15. Is Gap Insurance value for money?
16. How much should I be paying for Gap Insurance?
17. Is Gap Insurance transferable?
18. Does Gap Insurance cover all drivers?
19. Who is actually covering me with Gap Insurance?
20. Am I protected if my Gap Insurance company fails?

Q: What is Gap Insurance?

Gap Insurance, also known as Guaranteed Asset Protection, Asset Protection is a type of insurance that protects a form of financial loss in the event of a motor vehicle being declared a 'total loss' by a motor insurer. This may be following an accident, fire, theft, flood, etc, where the motor insurer 'writes off' the vehicle as a total loss, and agrees to pay the insured the market value of the vehicle at that time.

This issue with this 'market value' settlement is that it could represent a figure far lower than the insured first paid for the vehicle. This is where Gap Insurance can step in by covering an element of the financial loss suffered when the vehicle was declared a total loss.

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Anchor Q: Why buy Gap Insurance?


The consideration for Gap Insurance really comes from two factors. Firstly nearly every single motor vehicle you may purchase will lose value over time. The second factor is that your vehicle may become involved in an incident that could lead your vehicle to be deemed a 'total loss' by your motor insurer. This may be after an accident, theft, fire, flood, etc.

This combination of events may see your motor insurer making a 'market value' settlement for the vehicle to you, and this figure may be far less than you originally paid for the vehicle, or what you may still owe on finance. The Gap Insurance is designed to cover an element of your financial loss in this event.


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Q: How does Gap Insurance work?



For Gap Insurance to work, then you must have a motor insurance policy covering the vehicle in question. If the vehicle suffers an incident that leads the motor insurer to declare it a total loss and pays you the market value, then you can then claim on the Gap Insurance for an element of the depreciation the vehicle has suffered. What exactly you can claim for depend's of which type of Gap Insurance you have, and we will explain that later in detail.

So in short, you must normally have a comprehensive motor insurance policy in place for your Gap Insurance to be valid. If you do not have comprehensive cover then in many cases you cannot then claim on Gap Insurance for any loss.



That is easy, if the motor insurer returns the vehicle to you repaired, then you simply have not suffered a loss due to write off. There would be no 'Gap' to claim.


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Q: What are the different types of Gap Insurance?



If you have been offered Gap Insurance by the dealer, then that normally is just one type. You may be forgiven for thinking that that is the only option for Gap Insurance, but you would be wrong. There are several types of Gap cover protection, here is a basic explanation on each.

 

  • Return to Invoice Gap - sometimes known as just Invoice Gap or Back to Invoice Gap. This is usually the type of Gap cover offered in the motor dealer showrooms. It is designed to protect the difference between the motor insurer's settlement and the original net invoice price you paid. This may be suitable for cash purchases of new or used vehicles, and also hire purchase style finance agreements where you have the option to buy the car. 
vehicle replacement gap
  • Vehicle Replacement Gap - Slightly different to its closely related 'Invoice Gap' cousin in that is is designed to cover the difference between the motor insurer's settlement and the cost of replacing the vehicle with the same standard of vehicle you first started with. This would include any increase in any cost of that replacement.For example, if you buy a brand new Ford Fiesta Zetec in 2016 for £15,000 and the brand new equivalent in 2019 is now £17,000 then with Vehicle Replacement Gap this extra £2,000, is covered, meaning you can claim all the way to £17,000 for a replacement.


  • Agreed Value Gap Insurance - This is a style of Gap Insurance designed when you do not qualify for the other types of Gap Insurance. A typical example of this would be when you buy a car privately, and you do not have an invoice from a VAT registered motor dealer. It works by using a recognised valuation guide (in the case of GapInsurance123 the Retail Forecourt value from Glass' Guide), and in the event, your vehicle is declared a total loss, the Agreed Value Gap will cover between the motor insurer's settlement and the Agreed Value on the day you bought the policy. With GapInsurance123 Agreed Value we cover 105% of the Glass Guide Retail Value, and this means you get more cover than many other providers who only cover 100% of GGRV. For example, when a vehicle has a GGRV of £10,000 then your GapInsurance123 Agreed Value will protect £10,500.

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Q: When do you need to buy Gap Insurance?


If you make the decision that you want to buy Gap Insurance, then you normally have to do this within a timeframe of collecting your vehicle. This window to purchase can differ from policy to policy and insurer to insurer. Let's give you some comparisons between our GapInsurance123 website and our sister website's at Totallossgap, Shortfall.co.uk and at Easy Gap.

Finance and Contract Hire Gap

GapInsurance123 - unlimited period
Easy Gap - unlimited period
Shortfall.co.uk - 180 days from vehicle purchase
Totallossgap.co.uk - 365 days from vehicle purchase (new cars with 'new for old' with the motor insurance. 180 days used cars)


Combined Return to Invoice Gap

GapInsurance123 - 180 days from vehicle purchase
Easy Gap - 105 days from vehicle purchase
Shortfall.co.uk - 180 days from vehicle purchase
Totallossgap.co.uk - 365 days from vehicle purchase (new cars with 'new for old' with the motor insurance. 180 days used cars)

Combined Vehicle Replacement Gap

GapInsurance123 - 180 days from vehicle purchase
Easy Gap - 105 days from vehicle purchase
Shortfall.co.uk - 180 days from vehicle purchase
Totallossgap.co.uk - 365 days from vehicle purchase (new cars with 'new for old' with the motor insurance. 180 days used cars)


It may well be the case that these periods could be much sooner if you are considering buy the Gap Insurance from the motor dealer, where the window may be 30-90 days from vehicle purchase.

Once you are outside the permitted purchase period for the policy, you may still qualify for an Agreed Value Gap, but this is likely to offer less cover than Invoice or replacement protection indeed.

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Q: Is there Tax on Gap Insurance?


Yes, while insurance products are not subject to VAT they are subject to Insurance Premium Tax on every sale. When you buy Gap Insurance from the company who is involved in the sale of the motor vehicle to you, i.e., the motor dealer, then the premium is subject to the higher rate of IPT at 20%. When you buy the Gap Insurance from an independent provider, like GapInsurance123, then the sale of this insurance is subject to the standard rate of IPT at 10%.Insurance Premium Tax historical rises UK

The standard rate of Insurance Premium Tax was raised from 6% to 9.5% in 2015, and again to 10% on 1st October 2016.

It was announced in the Autumn statement from the new Chancellor Philip Hammond that Insurance Premium Tax was to rise again to 12% from June 2017.


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Q: Do you have to buy Gap Insurance at all?



The short answer is simply no. Gap Insurance is not a legal requirement, and therefore cannot be imposed on any person buying a vehicle in the UK. This is why you should be offered Gap Insurance separately from the deal you sign for when purchasing the vehicle. The new FCA rules brought in on 1st September 2015 hopefully will ensure that is the case these days.

On the basis that nearly all vehicles will lose value, and your motor insurer generally only covers you for the market value at the point of loss, then we feel Gap Insurance provides valuable 'peace of mind' cover for many motorists. But no everyone would share that view.

Gap Insurance, is it worth it? That is just a decision you have to make for your particular circumstance.


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Q: Do you have to buy Gap Insurance from the motor dealer?


Well, some motor dealers might like you think that way, but again the answer is clearly no. Again the new FCA rules in 2015 were designed to break the motor dealers 'point of sale' advantage and enable consumers to consider all providers in the market.

The idea now is that your motor dealer must provide, after presenting you with their Gap Insurance proposal, a period of time for you to consider your options in the Gap Insurance market, information that the policy is not mandatory and that you can buy it elsewhere.

The FCA were clear that they felt the previous position that motor dealers held was not conducive for real competition in the market. The new rules, it is hoped, will go some way to solve that problem.


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Q : What does 'GAP' stand for in Gap Insurance?



It is often assumed that the product is called 'Gap' because is fills the gap between the motor insurer's settlement and the amount you have insured. However, this is not the case. 'GAP' stands for Guaranteed Asset Protection.


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Q : What other names can GAP Insurance be known as?




This is an area that can cause some confusion as some insurers can call their versions of Gap Insurance by a different name. Some examples of this could include:
  • Asset Protection Insurance
  • Guaranteed Asset Protection
  • Shortfall Insurance
  • Equity Gap
  • Guaranteed Auto Protection (more the US market)
There can also be some confusion with slightly different names for the various types of Gap Insurance also. Examples of this could be:
  • Return to Invoice Gap - Back to Invoice Gap, Purchase Price Gap, Invoice Gap
  • Vehicle Replacement Gap - Full Replacement Gap, VRI Gap, Replacement Gap
  • Finance Gap - Lease Gap, Shortfall Gap, Finance and Contract Hire Gap
  • Agreed Value Gap - Return to Value Gap, RTV Gap, Value Gap

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Q : Can Gap Insurance also be confused with other types of Insurance?



Yes, there is a common type of 'Gap' insurance used for Gap Year students who are on holiday. Clearly, that is something entirely different. Another common misunderstanding is where some think Gap Insurance is something you take for a short term use of a motor vehicle. Another example could be a 'Gap' Insurance is to cover a 'gap' between a firm's Professional Indemnity Insurance payout and what claim a client may make. 

All of these are often confused with the Gap Insurance we provide against financial losses suffered as a result of a vehicle becoming a total loss.


 
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Q : What does Gap Insurance not cover?




This question really depends on the policy and the provider. However, some general area's where Gap Insurance does not cover you could be:
  • Where the motor insurer does not cover you - a key condition for Gap Insurance is that your motor insurer must provide 'full indemnity' (a posh term to say they must fully insure you) for the situation that may have happened that lead to the vehicle being written off. So examples of where your motor insurer would not do this would be things like drink driving and negligence e.g., you leave the keys in the car and leave the vehicle unattended. If the motor insurer does not pay out then the Gap Insurance cannot be claimed on.What Gap Insurance does not cover
  • Consequential losses - this is where you have other financial losses or expenses outside the financial loss due to the depreciation of the vehicle. Examples of these would include hire car costs or loss of property left in the vehicle if it was stolen.
  • Negative Equity carried from a previous finance agreement - this situation occurs where you have you part exchange a vehicle that has finance outstanding where the settlement on the finance is higher than its value at trade in. If your motor dealer then transfers this 'negative equity' on to your new vehicle finance package, then this would mean you borrow more than the purchase price of the new vehicle. This 'negative equity' element is not usually covered by Gap Insurance, however, at GapInsurance123 we can offer negative equity cover, as an optional extra, on some products. Other providers may be able to do the same.
  • Road Fund License - You can claim any unused Road Fun License back from the DVLA should the vehicle be written off by your insurer, so on that basis Road Tax is usually not covered by Gap Insurance.
  • Fuel Charges - sometimes the motor dealer will put a charge for fuel on an invoice. This is something you have had the full benefit of and therefore cannot generally be claimed back on Gap Insurance.
  • Admin Charges - some dealers may put an admin charge on your invoice for things like HPI checks and the preparation of any paperwork. These charges are not typically covered by Gap Insurance.
  • Some excluded vehicles - certain Gap Insurance policies may have a list of excluded vehicles like some specialist use vehicles like ambulances, emergency vehicles and police cars and some excluded manufacturers like Ferrari, Aston Martin and other 'super' car specialists.


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Q : Is it worth getting Gap Insurance on a new car?



There are several factors to consider when buying Gap Insurance for a new car. New cars are an expensive item, and you may expect that the value of a new car will depreciate at its quickest rate in the first few years of its life. Should the vehicle be written off then, you could expect to potentially lose thousands of pounds in that event.

That is a good argument to consider Gap Insurance, but there are other aspects to consider.Is Gap Insurance worth it on a new car?

Many motor insurers will offer a new vehicle replacement should the vehicle be deemed a 'total loss' by them in your first period of ownership (commonly the first year). This means that instead of only paying you the market value then they will actually provide you with a replacement new vehicle instead.

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Q: If you have 'new for old' then is there no need for Gap Insurance then?



Maybe not, on the face of it, but there some things to consider. If you want Gap Insurance to cover you after the first year is up then it may not be as simple as coming back in 12 months time to get your cover in place. This is because many Gap Insurance providers limit the period allowed between purchasing the vehicle and purchasing the Gap Insurance policy. Typically this can be 180 days. So if you left buying Gap Insurance for a year then you may not have many providers who could offer you one of the best levels of cover. Even those who may be able to offer you a Gap policy you may find that the premium is higher than it would have been if you had bought Gap Insurance at the time you bought the car.

So if you already have effectively Gap Insurance in the first year but you also want the option to cover you for later years then what is the answer? You can, in many cases, defer your Gap Insurance for the first year. This means you buy the Gap Insurance.


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Q : Is Gap Insurance more important on a new vehicle than a used one?



The two factors behind the decision to get Gap Insurance on a new car can be simplified as a new car nearly always depreciates at a quicker rate (certainly initially) that a used vehicle and you normally pay far more for a new vehicle than you would for a used example of the same model. So more depreciation and at a quicker rate means that a financial shortfall can occur. This is well worth the consideration of protection in many cases.

A used vehicle will also suffer from depreciation but as it was cheaper in the first place then you would hope that the steepest depreciation has already happened. There is possibly a better argument for GAP Insurance on a new vehicle but if you are concerned about any financial loss if the vehicle is written off then cover can be useful for new or used.


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Q : Is GAP Insurance value for money?


I am sure thoseof you who have researched Gap Insurance will have found a range of views from those on internet forums and such like. Many see Gap Insurance as 'money for old rope' as the chances of a car being written off is relatively low. There may be an argument for this but for those who have been in that situation, and have had to use their Gap Insurance then we suspect the view point may be very different.

It is an accepted fact that the rate at which vehicles are written off each year, and therefore the rate at which a Gap Insurance policy can be claimed on, is relatively low. Various sources seem to indicate that somewhere around 500,000 vehicles are written off each year. Sounds a large number but when you realise that there is north of 30 million vehicles on the UK roads then this is put into perspective.

So low claim rate - accepted.

When buying a vehicle another fact must almost always be accepted............the vehicle will lose value during the period of your ownership.

If you look at a brand new vehicle then some may only be worth 30% of the original value in three years time. Some may fair better than that but it is not unusual to expect a new car to have lost at least 50% of its original value in the first three years.

The third factor to consider is that if the vehicle is written off (that is the motor insurer deems the vehicle beyond repair following an accident, theft, flood etc) then the amount your motor insurance will pay is normally only the market value of the vehicle at the time of the incident. This is NOT the price you originally paid for the vehicle, nor is it guaranteed to be enough to pay off any outstanding finance or give you enough to effectively start again with the same age and mileage example as yours was on the day your bought it.

Gap Insurance can help you bridge the losses described above. How much is Gap Insurance?


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Q: How much should I be paying for Gap Insurance?




A really good question, and the answer depends on a number of factors.

The price of the vehicle - the more expensive a vehicle is to start with, the more depreciation it can suffer and therefore the risk of a higher payout is there for the Gap Insurance policy.

The length of cover required - again the longer you want a Gap Insurance policy for the bigger the depreciation will be on the vehicle, the bigger the risk to the Gap Insurance policy.

Where you are buying the policy from - given that the rate of insurance premium tax is higher, when you buy Gap Insurance from your motor dealer instead of through an indepedent provider like GapInsurance123, plus the commision structures are often quite different also, it can normally be the case that Gap Insurance through motor dealers is far more expensive than it is when purchased through indepedent providers.

Other factors can include the type of Gap Insurance you require. For example, if you buy a Vehicle Replacement Gap and compare the price of it to a Finance Gap then you should see that it is more expensive. This is because on a 'like for like' basis a Vehicle Replacement Gap will provide a higher settlement than a Finance Gap polic in nearly every instance.




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Q : Is Gap Insurance transferable?

Generally Gap Insurance can be transferred from the policyholders old vehicle to the policyholders new vehicle, subject to the terms and conditions of the policy being met. This cirumstance normally occurs when you part exchange you old vehicle, that has Gap Insurance cover, for a new vehicle.

You should check the policy terms and conditions however, as not all policies will have the option to transfer within them.

Circumstances where you cannot transfer the Gap Insurance may include:

  • where you have made a claim on the Gap Insurance already
  • where you sell the vehicle privately and you ask to transfer cover to the new owner
  • where the new vehicle purchase would increase the risk on the Gap policy. This would be where either the new vehicle is more expensive or you want longer cover than is currently left on the policy. In this situation you may be able to look to receive a 'credit' for what is left on the current policy and this amount is taken off the cost of your new policy.

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Q : Are all drivers covered by the Gap Insurance policy?

In general, the main motor insurance policyholder plus all 'named' drivers would be covered by the Gap Insurance policy you purchase. This would include any driver you add at a later date than the purchase of the Gap policy also. The drivers must be fully comprehensively insured at all times and all other policy terms must be met. For example, some Gap Insurance policies require all drivers to be over 18, or have a full driving license.

Again you should check the individual policy terms of your Gap Insurance policy to ensure that the general terms we normally see do apply in your case.


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Q : Who actually covers you with the Gap Insurance policy?


When you buy a Gap Insurance policy there are often three separate companies involved with that policy. They will be
  1. The Retailer - this is the company who actually sell you the policy. This may be the motor dealer, the finance company or the independent brand like GapInsurance123. This company is only concerned with the sale of the policy to you and is not normally the underwriter of the policy nor would they handle the claim. The retailer will act as an agent for the insurer and would advise you on the purchase of the policy. They would expect to be responsible for any complaint regrding an concern over any misselling of the cover.
  2. The Claims Administrator - this is the middle man between the insurer and the retailer, who normally would process any claim you make on the policy. They are not the underwriter ultimately but will act on behalf of the insurer in payng out any claim. If you disagree with how the claim is handled then the complaint for this would normally be sent to the Claims Administrator in the first place.
  3. The Insurer - this is the company who ultimately 'insure' your policy and guarantee your payment of any claim. Insurers rarely deal directly with consumers in the Gap Insurance world. Instead the use the 'retailer' as an agent to sell the policy and the claims administrator to process any claim.

As you may suspect it is the insurer who is the most important company in the process. If the retailer, or even the claims administrator ceases to trade then your policy remains live and in place.


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Q: Am I covered if the Gap Insurance underwiter goes bust?


If the retailer is a UK based company then you should have automatic protection under the Financial Services Compensation Scheme should the insurer fail or go bust. This means that you could be covered for up to 90% of your claim if the insurer cannot meets its obligations to you.

Q: Does Gap Insurance cover engine failure?

No, Gap Insurance does not cover engine failure. It will only protect you in the event where your main, fully comprehensive motor insurer writes off the vehicle as a 'total loss' and pays out its market value. This could be after a theft, fire, accident (fault or non fault), flood etc.

Q: Does gap insurance cover trade in depreciation?

No, all vehicles will lose value. If you get less in a 'trade in' than you first paid, or you owe more on finance than it is worth, then Gap Insurance cannot cover this.





Absolutely amazing. Simple, straightforward and easy to get a quote. I wish I used this provider for my last car, I would have saved over £200.
5 out of 5
Mr Stephen Mackay
Excellent - good choice of cover - great price - clear English and documents sent straight to my email address. I tried 3 quote engines or at least what I thought were quote engines and was told I'd get a call back with the quote -- it never happened. Very pleased.
5 out of 5
Mrs Tracey Collen
After researching various different outlets I chose GAP Insurance 123 as it appears to give the best value for money, just hope I never have to claim on the cover I have taken out.
5 out of 5
Mr Frank Wilson
I was nervous about finding GAP insurance for my self but when the dealer I bought my used car from wanted over £350 for GAP I looked around and got cover from gapinsurance123 for less than half the price. Great website with explanations of what the different types of GAP cover helying you to decide which is the most suitable product for you.
5 out of 5
Mr Nicholas Joel Hancock
Very simple process, terms and conditions clear and easy to understand. Saved 60% of the premium Dealer was offering. Well Recommended
5 out of 5
Mr david shuttleworth
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