Chances are you’ve heard of GAP Insurance but you might not understand what it does. Here we look at how GAP Insurance works and who its right for.

What is GAP Insurance?

The term GAP Insurance refers collectively to a range of GAP Insurance products on the market of which there are three types:

- Finance GAP Insurance

This is designed to help motorists cover any potential negative equity in the event of a write-off. It pays the difference between what a finance company requires as settlement for the vehicle and what the car insurer agrees to pay. Though it clears outstanding finance it does not recover any deposit originally paid.

- Return to Invoice GAP Insurance

This helps motorists cover the full initial invoice price in the event of a write-off. It pays the difference between what you paid for your vehicle and what the car insurer agrees to pay by way of settlement for the vehicle. It can also be used to clear any outstanding finance agreements and if there is a surplus you can put that towards a deposit for a new car.

- Vehicle Replacement Insurance

This pays the difference between the amount you receive from your car insurance company and the purchase price of the nearest equivalent specification of the original vehicle. It can be used to clear outstanding finance with a surplus towards a deposit on a new car.

There are many circumstances in which GAP Insurance may be considered including: if your car’s value depreciates quickly; borrowing over the purchase price; getting a loan with an extended term; and if you put no or little money down because you may slip into negative equity as soon as you drive the car away from the showroom.

Is your vehicle eligible for GAP Insurance?

There are restrictions placed on whether a vehicle is eligible based on when the insurance is taken out.

- If bought within three months of delivery, vehicles that qualify are: New/used cars up to five years old; cars and vans owned outright, financed or leased vehicles; motorcycles owned outright or on finance; motor homes owned outright or on finance; trucks on finance or leased.

- GAP Insurance bought after three months of delivery or if the vehicle is more than five years old: Vehicles must be owned outright or on finance but not leased; used cars and vans must be up to 10 years old.

So is it worth taking out GAP Insurance?

The idea behind GAP Insurance is that it covers the unexpected. For example, even if we buy a car with the intention of replacing it in a few years we might expect to financially prepare for depreciation and for a deposit for a replacement, but what if replacement is brought forward by a theft, fire or accident? In these instances, GAP Insurance helps take care of the loss.

Though many car insurance companies offer “new for old” replacements of vehicles in the first year there may be policy restrictions – for example a payout could be reduced if a vehicle is stolen after a thief gains access to keys by first breaking into a home. GAP Insurance can also be particularly beneficial when leasing, as, in the event of a write-off, many leasing companies will not bear the loss and will expect to recover all payments and incomes contractually due to them.

Choosing the right GAP Insurance

Just as you would compare cheap car insurance quotes online, make sure you compare GAP Insurance before you buy. In particular, be aware of excess deductions, annual payout reductions and check to see that any dealer fitted extras are included in your cover limit.