Gap Insurance

What is Gap Insurance?

When buying a brand new car, its value will depreciate as soon as you drive away for the first time. The AA once explained that a car depreciates by around 40% in its first year which rises to 60% after three years.

This depreciation has significant effects on car insurance policies and makes the total loss from purchase significantly high. Should a total loss occur, the Insurers will only pay out what the car is worth at that time, not the price when you bought the car? Therefore, if your vehicle is stolen or written off, the insurer pays far less than the original purchase price.

This is where car gap insurance comes in. The “gap” refers to the difference between what your insurer pays out and what you paid for your car.

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Gap Insurance can be used on both brand new and used cars. However, it will provide greater value for new cars as they will lose their value much quicker than used cars. There are four main types of Gap Insurance you can buy to cover your car. Those are:

  • Car Replacement Insurance: covers the difference between what your insurer pays out and how much the car would cost to buy new.
  • Return To Invoice: covers the shortfall between what your insurer pays out and what you originally paid for the car.
  • Return To Value: the difference between the insurance payout and the market value of the car at the time of purchase.
  • Finance Gap Insurance: pays off any finance on the car you own if the insurance payout isn’t enough.

Overall, it’s about deciding whether gap insurance is worth the money and necessary.

Do I Need Gap Insurance?
There are advantages and disadvantages to whether you should buy gap insurance. It has somewhat of a bad reputation due to pushy sale techniques in the past and customers being forced to purchase. Therefore making it hard to decide whether it is a necessary buy. In some cases, it is not, so it is about weighing up the pros and cons and deciding what policy is right for you.

Here are some reasons why you should not need or benefit from Gap Insurance:

  • You are not worried about your car’s depreciation and are willing to accept a payment for a like for like vehicle.
  • Your car is brand new, and you have fully comprehensive cover. Most insurance policies will offer a new car replacement service on this level of cover, so you don’t need additional gap insurance.
  • Your car is used and old; therefore meaning you won’t reap as many benefits from gap insurance as a new car owner would.
  • Some reasons why you might benefit from gap insurance are:
  • You are not satisfied with the depreciation of your car and want a brand new car worth the same value as your original payout. If this is the case, then gap insurance is worth considering.
  • Your car is on finance, meaning that if your vehicle is written off or stolen, then you still need to pay the full cars worth which won’t be covered by standard insurance.

Making a claim & getting a refund from Gap Insurance
If an accident happens or your car is stolen, then you will need to make a claim on your car insurance and declare your vehicle a total loss. Then before accepting any insurance settlement contact your gap insurance provider. In some cases, they will take over proceedings and handle negotiations for you.

The final stage is filling out of forms and sending official documents such as MOT certificates.

In some cases, your claim may be rejected or present an unwanted outcome which is not what any car owner wants. If this happens, you have a right to complain to your insurance company and dispute the result. You should wait around eight weeks to hear from your insurance company for a resolution.

The next step would be to present your case and get it regulated by the financial ombudsman service. An independent adjudicator will assess your situation and decide whether it should be awarded in your favour.

Want to know if you are entitled to a refund from gap insurance?
If you are fortunate enough to pay off your car loan early then, you are entitled to claim back a partial refund for the remaining insurance. The original contract would have calculated costs based on the price of the car and the loan term.

Therefore if that loan term is cut short, you should be refunded the unused premiums. So it is well worth looking into if you are paying off your loan sooner.

Overall gap insurance is a complicated insurance policy to get your head around. Pinpointing the beneficial effects can be hard. It doesn’t have to all be decided when you buy your car and can be purchased afterwards if you do start to get worried about the depreciation of your vehicle. Be sure to look into whether it is worth the costs and if you will benefit from it before purchasing the kind of insurance.

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