Whether you’re a first-time buyer or you’re looking to upgrade, If you want to be fully financially protected when purchasing a vehicle, gap insurance is one of many assets to help keep you fully protected. While auto insurance covers the actual cost of any car damage itself, gap insurance is a great tool when it comes to sorting out any financial litigation with your insurer.
While it is fully optional and not compulsory to have, gap insurance can provide peace of mind to car-buyers, knowing that even if their car is totaled or stolen, you’ll be in safe hands.
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What exactly is Gap insurance, and why do I need it?
Gap insurance is a form of coverage that you may get to cover yourself while purchasing a new automobile. It is intended to cover the discrepancy between what your auto insurer would pay you if your car was stolen or written off and what you paid for it.
If you buy a brand new automobile, its value diminishes by one-third the moment you drive it off the lot. According to the AA, its value will then plummet by an average of 60% over the next three years.
On the off chance your vehicle is either stolen or written off, you will only receive a valuation for what the vehicle is worth at that moment. This means the insurance company is likely to put a much lower valuation on the car than what you paid on the day you purchased it in the first place. This difference in valuation is the ‘gap’ in gap insurance because the insurance company will likely pay you less than what it would cost you to buy the same or similar vehicle again.
However, gap insurance isn’t designed to replace your vehicle directly. What gap insurances guarantees, instead, is that you’ll be covered for the exact amount of money to either clear your financial losses or buy an exact replacement (in make and model) of the car that was totaled.
Gap insurance can be a beneficial tool and should be considered, but it will not be appropriate for everyone. Gap insurance is most likely to be helpful in the following scenarios:
- Your vehicle is on a long lease
- You’ve taken out a large loan to purchase your car
- Depreciation is affecting the valuation of your car
If you have a long-term lease agreement for a car with a mileage allowance, a write-off might result in you not having a car and owing thousands of pounds. This is something that gap insurance can help with. Gap insurance can also help you pay off an outstanding loan on your automobile, so if it’s stolen or destroyed beyond repair, you won’t have to keep making payments on it.
Depreciation is also a risk, so it’s worth noting the quicker your car loses its value, the less your insurer will pay after a total loss incident, compared to what you paid for it. Gap insurance means you’ll get more back.
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Is gap insurance necessary?
Gap insurance is not mandatory because your auto insurer should already pay for a new car of a similar age and condition should you lose your vehicle for any reason covered by your auto insurance plan. Gap insurance is useful, however, if you wish to buy a new automobile to replace your old one, or if you have a financing contract and owe more to the finance company than you would get from the insurer.
Gap insurance is a good investment if…
- You want your replacement car to be brand new: If you purchase a brand new car, gap insurance can help ensure that it is properly protected and can be replaced in the event it ends up written off or stolen.
- You owe money to an automobile financing company: If you borrowed money to acquire the automobile, such as a personal loan, gap insurance may be handy. This is because if you buy a car this way and it’s written off or stolen, even if your auto insurer pays you the amount it’s worth at the time, you’re still obligated to pay off the amount you paid when you initially got it. Even if you wreck the automobile or it is stolen, you must still repay the entire loan. However, if you have gap insurance, it would pay off the loan, ensuring that you are not stuck paying back money for a car that you no longer own.
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You may not need gap insurance if…
- You do not need your replacement car to be brand new: If you aren’t concerned by your car’s devaluation, there isn’t much use in purchasing gap insurance. If your vehicle is stolen or written off, your car insurance will pay for a replacement – so you’ll get a vehicle that is similar to the one you had originally. The primary advantage of gap insurance is that you’d get the initial money you paid back, but that might not be necessary for you in this situation.
- Your vehicle is less than a year old and you have comprehensive car insurance: Most fully comprehensive vehicle insurance plans include new car replacement for new cars for the first 12 months, and occasionally even 24 months, so if yours does and you’re still in this period, you won’t need gap insurance.
- You have a used car: Gap insurance is less effective if you buy an old automobile. This is due to the fact that the value of a used automobile does not depreciate at the same pace as a new car. According to Cap HPI, the value of a three-year-old automobile drops much less than the 60 percent average loss for new cars in the first three years. As a result, the difference between what you paid and what the insurer will pay you will be much less, and the gap policy may be rendered obsolete.
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What does gap insurance cover?
Gap insurance is typically divided into three distinct types to fit your specific needs, these types are:
- ‘Vehicle replacement’ gap insurance: This compensates you for the discrepancy between what the insurance would reimburse you and what you would spend if you bought your vehicle today, or how much it cost when you first bought it if it was a used car.
- ‘Back to invoice’ gap insurance: This compensates you for the discrepancy between what your vehicle insurance will reimburse you in the event that your car is written off or stolen and the original amount you paid for it or the amount you owe to a financing company.
- ‘Contract hire’ gap insurance: This is only available to people who lease their vehicle and do not have the ability to purchase it. Your auto insurance will pay the current market value of the car, and the gap insurance will cover any remaining lease payments.
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Where can I purchase gap insurance?
Many customers are exposed to gap insurance at a vehicle dealership, where its frequently provided as part of a package of ‘add ons’ that sales personnel will try to persuade customers to purchase.
That being said, your dealership may not be the ideal location to purchase gap insurance. It’s frequently available for significantly less money online, either directly from insurers and brokers or through comparison sites.
Dealerships have strict guidelines to follow when attempting to sell new car-buyers gap insurance, and they’re legally obligated to share these pieces of information before you make a purchase:
- The total premium amount
- The length of the policy
- Any features, benefits, unusual exclusions, and limitations of the product
- That the product can be bought elsewhere from standalone providers
- Whether gap insurance is an optional or compulsory add-on to the sale of the vehicle
Additionally, dealerships are no longer permitted to offer you gap insurance on the same day they sell a car. Unless you wish to waive the waiting time, there must be at minimum a two-day delay between sales.
If you wait two days or more, the dealer should go through the policy details again. The choice to waive the waiting time must be made by you and cannot be recommended by the dealership.