What is GAP Insurance?

Guaranteed Asset Protection sounds like a tempting offer, but is it worth signing up for?

Words by: Additional words by: Jon Quirk Last updated: 24th November 2015
When you buy a car, you may be offered something called GAP insurance. The name stands for ‘Guaranteed Asset Protection’ and there are three main types.

All three types work on the principle that cars lose value as they age, and if your car is stolen or written off, you could be left with a shortfall, owing more in finance than the car is worth at that point (which is what the insurance company will probably pay out).

Although GAP insurance is most relevant to people buying a new car, anyone buying a car which is under ten years of age from a VAT-registered dealer can buy GAP insurance.

The three types are:
  • Finance GAP insurance, which will pay the finance company enough to cover your debt
  • Return-to-invoice insurance (also known as Back to Invoice insurance), which tops up the insurers’ payment to what you paid for the car in the first place
  • New Car GAP insurance, which works on the same basis as Return-to-invoice insurance, but takes into account the fact that cars can rise in cost, and will pay you enough to buy an equivalent car to the one you lost
According to the government’s Money Advice Service, you could end up owing more than the car is worth in several cases:
  • If you paid only a small deposit on your finance deal
  • If your car loses value very quickly
  • If you’re paying a high rate of interest
  • If you’re paying the debt off over a long time
  • If you have a big lump sum to pay off at the end of finance term
This could also happen if you’re on a contract hire deal.

According to the service, this sort of insurance isn’t suitable if the finance deal already covers you for such a problem; if you can already afford to make up the shortfall anyway; or, if your car insurance already offers ‘new car replacement’ during the first year (for example) of your ownership.

However, Simon England of ALA Insurance says this insurance can still be suitable even in the last case, as there are instances where an insurer may not pay out the full new for old settlement as it is not unconditional.

Also, GAP insurance has to be bought, usually, within 180 days of purchasing the car. While this can effectively mean a duplication of cover in the first year (or part of it), not purchasing the cover within the timescale permitted by underwriters can mean the consumer is left without cover beyond the first year.

Likewise, if the customer has bought a pre-registered or second hand car, 'new-for old' would not apply with most insurers.

Finally, there is an option for deferral of the start date of the GAP insurance with some companies, but if any of the above conditions apply and new-for-old is not paid by the insurer, the customer would still be left with a shortfall in the first year as the GAP policy will not be in effect.

There are also some things to be wary of, such as the fact that GAP insurance won’t cover you for any extras you added to the car after you bought it, such as an upgraded stereo or sat-nav. It also won’t cover you for any sum deducted by your insurance company (for unpaid premiums, for example), and nor will some policies cover you for the balance if you agree a below-market value for your car.

Last, but not least, even if you do want GAP insurance, it’s important to remember you don’t have to buy it as part of your car-buying finance package: it’s perfectly acceptable – and almost always cheaper – to buy it separately.
  • TOP TIP – Even if you want GAP insurance, you don’t have to get it from the dealer.
To buy GAP Insurance, visit our GAP Insurance page.