If you’ve just bought a new car, then you might have been introduced to gap insurance. It’s designed to cover the gap between the amount you paid for your car and the amount your insurer will pay out in the event of a claim.
It’s often touted by car dealers as a way of protecting yourself from being left out of pocket in the event of a claim. Car dealers can earn anywhere up to 70% of the policy value in commission, which can lead them to adopt pushy sales tactics, giving gap insurance a bad name.
For some people gap insurance is a waste of money, but for others it’s invaluable. It all depends on your specific circumstances. There are a few things to consider:
- Your circumstances and your vehicle
- Type of policy
- The insurer
Gap insurance is worth buying if:
You have bought a car which is likely to lose value quickly
As soon as you drive your vehicle off the forecourt, it starts to lose value. This can even be true of second hand or privately sold vehicles. Gap insurance helps guarantee that the amount you receive in the event of a claim reflects the purchase price of the car.
You want a brand new car
If your car is written off or stolen then your car insurer will likely pay out its current value (unless it is under 12 months old). That means that without gap insurance, the amount you receive will unlikely cover the cost of a new car.
You have bought a car on finance
If you bought your car on finance or on a lease then in the event of a loss you will need to settle any outstanding debt with the finance company. This may leave you with almost nothing left over to buy a replacement vehicle. Some gap insurance policies cover outstanding finance, so you wouldn’t be stuck repaying finance on a car you don’t own.
Gap insurance is not worth buying if:
Your car is less than 12 months old
Most comprehensive car insurance policies will pay out for a brand new car if your car is written off. Remember to check the policy wording first.
You’d be happy with the pay out from your car insurer
In the event of a claim, your car insurer should pay out up to the current market value of your car. That might leave you with enough cover, particularly if you own an older car. To check the value of your car you can use any car sales website, or good comparison website.
What type of gap insurance policy do I need?
Gap insurance is only worth it providing you buy a policy which is suitable to your needs. There are three main types of policy:
- Return to invoice (RTI) – This pays out the difference between the amount you get from your car insurer, and the invoice price you paid for your vehicle. So if you bought a new or used car from a dealer, then this is probably the right type of policy for you. RTI gap insurance is generally unsuitable for lease/contract hire cars.
- Vehicle Replacement Insurance (VRI) – VRI is very similar to RTI but covers the cost of a replacement car of the exact same make/model and trim. Although this sounds good, the difference between RTI and VRI is not always clear. For most people an RTI policy is sufficient.
- Return to Value (RTV) – These policies tend to be cheaper, but only cover the difference between the amount you get from your car insurer, and the value of your car when you purchase the gap insurance policy. It’s more suited to used cars purchased privately, or from a dealer some time ago.
- Lease/Contract Hire – If you have a lease or contract hire vehicle then you’ll need a specialist policy which covers the difference between the amount you get from your insurer, and the amount required from the lease company to settle the contract.
Remember that if you purchased a vehicle using any form of finance, then you should buy a policy which includes finance cover. This will ensure that you can pay off the remaining finance in the event of a loss.
Avoid buying gap insurance from your car dealership
The commission car dealers earn from policy sales gives them an incentive to push gap insurance. Unfortunately, many of the policies they sell are overpriced or provide an inadequate level of cover. We’d recommend that you never buy gap insurance from your dealer, without getting comparison quotes online first.
There are many gap insurance providers in the UK, offering a range of different policies. You should check that you are buying from a reputable business, which is FCA authorised. You could also do some research online to check reviews and feedback from other customer before you purchase a policy.