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What is GAP insurance?

Purchasing a brand new vehicle can be a thrilling experience, especially when you have the chance to pick the upholstery, any modification, the colour and also enjoy the smell of a new car too. However, whilst all these experiences are infinitely enjoyable when buying a new car, if things go wrong it can all very quickly go the other direction. When you get a new car, your car insurance policy will typically only pay out what the car is considered to be worth at the time. Unfortunately, this could well be far less than you originally paid. But why is that the case if it is brand new? According to the insurance company AA, a new car can end up losing as much as 40% of its original value after the first year. Unsure as to whether you can find a car insurance policy that means you are protected in this scenario of your vehicle getting unexpectedly damaged? You could look at purchasing GAP insurance as an option. Not sure what that is? No problem, in this guide, we will explain all the things you need to know when it comes to this kind of insurance cover.

What is GAP insurance?

If you take out a Guaranteed Asset Protection (GAP) insurance policy, it means that you as a driver are protected in the event that you put in an insurance claim and end up receiving a payout that is considered to be less than the value or cost of the vehicle when you purchased it. That means that you will be paid the difference, meaning that you do not end up losing money.

Usually, you will find that a GAP insurance policy cover is associated with new cars. Nevertheless, it can still be possible to buy this type of cover with a second-hand car under seven years old. After a vehicle reaches this age, it is deemed to be too old to cover any gap, therefore, you will find it difficult to get GAP insurance.

Why do I need GAP insurance?

Wondering why you should get a GAP insurance policy? It is a well-known issue that unfortunately, new vehicles start to depreciate as soon as they are driven off the forecourt. In terms of just how much value you can end up losing when making a claim, here is an example for you: say you drive an average of 10,000 miles each year in this new car, you may end up losing as much as 60% of its original value after just three years, according to experts in the field.

The actual rate of depreciation will be dependent on a variety of factors, which will evidently impact just how much money you can end up losing. Important reasons that lead to depreciation includes model, make of vehicle and usage. But on average, if you buy a car worth an estimated £20,000, you can expect that after a period of 3 years it is worth just under £8,000.

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A GAP insurance policy can cover the gap in cost between your insurer and the cost of a new vehicle.

Another potential problem you could encounter is that if you bought this brand new vehicle with car finance, in the worst case scenario you may well end up having to make repayments for a car you no longer have because it is damaged. Alternatively, if you paid for the car outright and the car is no longer usable, you may well end up out of pocket by a considerable amount. Whatever the scenario may be, it could mean that you are unable to afford to replace the vehicle with another model that is similar.

However, this is where a GAP insurance policy can come to the rescue. A GAP insurance policy cover prevents such scenarios from occurring, helping to give you some piece of mind.

Do I need GAP insurance?

If the car insurance policy that you have enables you to get a car replacement that is of a similar condition and age when yours had been written off, and this is all you require, then this kind of policy may not be needed for you.

However, if your brand new vehicle is damaged and you want your replacement to be a brand new vehicle, you should perhaps consider looking at GAP insurance. In addition, if you have taken out finance in order to buy a vehicle, then you will find the payout is usually not enough to clear the debt, so you are most likely to end up stuck paying for a written-off car. Therefore, GAP insurance in this situation can be particularly useful to you.

Categories of GAP insurance

If you decide to make the decision to get a GAP insurance policy, then it is worth keeping in mind that there isn’t just one type of insurance policy to choose from. There are three types of GAP insurance available, all with the same aim of topping up any payout you end up receiving from your car insurer. The categories of insurance are as follows:

  • Return to value: this GAP insurance policy will cover you for any difference between your car insurer’s maximum payments alongside the value of the car when it was new. This is usually aimed at those who have purchased a car secondhand.
  • Return to invoice: this cover  will pay the difference between the insurer’s premium or the ‘total loss payment’, as well as the exact cost of the car that you paid
  • Vehicle replacement cover: you will be covered for any difference between the insurer’s total loss payment and any cost replacing it in order to get a new car model, specification and make. It is aimed at those who want to replace a vehicle like-for-like, or having to pay for a car that has become more expensive than what you originally paid.

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