What Is Gap Insurance?

By Anna Chisholm, Car Insurance Comparison Education Editor

Gap insurance, the short term for Guaranteed Car Protection Insurance, is a type of insurance bought to cover the difference between the amount of payoff and what the insurance company will pay for it if it has been totalled or damaged. This type of insurance is available through most insurance companies or car dealerships. It is offered to new car owners because they stand to lose more money should something happen to their vehicle. Gap insurance can be bought at any time, but it must be purchased before the car has reached a certain mileage limit or time period. Each insurance company is different, but it is best to add it to a motor vehicle policy as soon as the vehicle is purchased to gain the most value out of it.
New vehicles lose their value, usually around 20 or 30 per cent, after they have left the car dealership lot. This means that a $20,000 vehicle will only be worth around $15,000 after it has been driven around for a few months. If the person driving the new car is involved in an accident and the car becomes totalled, then the insurance company will offer a price. Say the person owes $18,000 on the car, and if the insurance company offers $12,000 to write the car off, then the owner is left with $6,000 to cover out of their pocket. That is where Gap insurance comes in because it will cover the difference between what the owner owes on the vehicle and what the insurance company will cover. It can save a person thousands of dollars. The price for Gap insurance is worth the money that will be saved if something should happen to the car.

Who Should Get Gap Insurance?

This type of insurances is recommended for new car owners. Since their vehicle loses value, also known as depreciation, the chance that the insurance company will pay the same amount as what the owner has left to pay is very slim. Gap insurance is rarely sold to people with used vehicles because the price may be already paid off or the difference may be a small price to pay compared to those with newer vehicles. Some people may already have Gap insurance but may not know it. They should check with their insurance company to be sure. Also, Gap insurance is very affordable, and a great investment for new car owners.

While we are all responsible for our own actions, we cannot control the actions of other drivers. Having this extra insurance can save a person thousands of dollars. However, some insurance companies do not cover theft with Gap insurance, so it is important to research many different companies on prices and policies. Some companies cover damage caused by natural causes while others do not.

A full coverage insurance policy can coverage many aspects of the accident, but it will not cover any difference between what the owner owes and what the insurance company will offer. Again, a new vehicle depreciates around 30 per cent just three months after it has been purchased so the chance of the insurance company offering a retail value price to write off a car is very unlikely. It will offer the market price, which is going to be much lower than what the person bought the car for, even if it was just months ago.

Gap Insurance in the UK

There are two types of Gap insurance policies in the UK, Invoice and Replacement Gap. Invoice Gap is the price that the vehicle owner purchased the car for based on the invoice from the dealership. This amount will be used to determine the difference after the motor insurance company has offered a price. The Replacement Gap policy uses the manufacturer’s full list price to determine the difference in order to replace the vehicle with its equivalent. Usually these policies must be purchased within a few months after the vehicle has been purchased or before it reaches a certain mileage point. Gap insurance is bought to protect car investments and to make sure that the owner does not lose out if something bad should happen to it.