What is gap insurance?
Put simply, it is used to protect car buyers from ending up in a ‘negative equity’ situation if they finance a new or used car, and then crash it soon after purchase. It covers the difference in price between the value of the car when bought and the amount an insurance company would pay out in the event it is written-off or stolen; hence its full name of guaranteed asset protection (gap) insurance, although people often use it now for its other connotation of protecting you from a ‘gap’ in values.
It is designed to negate the effects of depreciation, which affects almost all cars (with a few notable exceptions), and so it is much more useful to buyers of brand-new cars, which depreciate the fastest and heaviest, rather than second-hand cars, which depreciate less and more slowly; however, it can be offered on used cars.
In essence, assuming we’re talking about buying a new car, as soon as you drive it off the forecourt it will lose value and be worth less than what you paid to purchase it; if you bought on finance then bundled into the cost of the car will be various dealer fees, taxes and registration costs as well. Provided you never have an accident during the finance term of the car, then gap insurance will be totally redundant and you shouldn’t need it.
But if the worst happens and you have or are involved in an accident that writes off the car, or it is stolen and not recovered, gap insurance comes into play. An insurer will, in this instance, pay you what the car is worth at the time – the sooner after you bought the vehicle it is, the bigger the gap between what you paid and the car’s worth will be (as finance over a longer period will eventually bring you into a position of positive equity). So, for instance, you could put €2,000 down on a €30,000 car, own it for a few months and then have it stolen, and the market value could be €22,000 or €23,000 – meaning that’s what you get paid, leaving you with a €7,000 or €8,000 gap in finance… and no car, to boot.
Instead, for a small fee (it’s typically only around €500 for three years’ worth of cover), gap insurance will ensure that the ‘missing’ €7,000 or €8,000 in the example above will be covered as well, ensuring you are never out of pocket if the worst should happen at the most inopportune moment.
So do I need gap insurance?
Well… yes. And no. It all rather depends. For instance, gap insurance only usually pays out if you’ve got fully comprehensive insurance on the car in the first place. And if you’ve got fully comprehensive insurance and you have a total loss (write-off/stolen) in the first year of ownership, you’ll find most insurance companies will replace your car like-for-like in this instance – meaning you get a brand-new replacement car anyway.
Similarly, if you are buying an older used car on finance, the slower depreciation and smaller values involved mean it’s definitely not worth it. You’ll find the market value of your car should be much closer to what you paid to purchase it, so you won’t lose out on cash.
It is best used for the accident-prone who have a car on three-year finance, have spent their absolute maximum budget on buying the car in the first place and who then have a total loss scenario during year two of ownership. As you can see, quite a small segment of the car-buying populace…
Are you saying I should avoid it, then?
Not at all, but buy it with your eyes wide open and ensure it’s good value for you. It is a good idea if you’re buying a new car on finance, as it will negate the possible situation where you end up with no car and finance monies still outstanding; but, even if you do go for it, don’t necessarily take the dealer’s offer of gap insurance. You can often get a much cheaper policy from online providers or third-party brokers, so if you can make that initial one-off payment much lower, it might be worth having it simply for added peace of mind during your ownership of the car.