Be smart about gap cover

In the event of your vehicle becoming a total loss due to write-off or theft, gap insurance will cover the cost of a brand-new drive

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The shortfall risk
It is a well-known fact that new cars lose value fast – on average, as much as 60% after three years in fact. So even if your car insurance is fully comprehensive, you could still end up out of pocket if your new car is written–off you will only be eligible for a pay-out equivalent to its current value.

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You may consider yourself a careful driver, but numerous total loss claims are caused by the actions of third parties. And with around 450,000 accident-related write-offs and 150,000 cars stolen each year, it is important to think about how to protect your finances if the worst happened.

Plug the financial gap
Put simply, gap insurance covers the difference between the market value of the car, which is the amount your car insurer will usually pay out, and the amount you paid for the car in the first place.

What exactly you get back will depend on your policy and:

  • what you paid for the car
  • what you still owe on the car
  • what it would cost you to buy the car now

Weigh up the odds
Unlike car insurance, gap insurance is not compulsory, so it is completely your choice whether you take it out or not. That said, it is a useful thing to have in a number of circumstances.

If your down payment was small or you are paying the debt off slowly, you could easily end up owing a leasing company more than your insurance provider is willing to pay out without gap insurance. It is also worth considering if you are concerned about the depreciation of your vehicle, or if you simply couldn’t afford to buy a replacement.

However, if your car is less than a year old and you are the first registered owner, it might not be so suitable. Some fully comprehensive car insurance policies offer a replacement deal during the first 12 months of ownership.

It is also worth checking if you are already covered by your finance agreement. Some agreements cover you for the difference between the book price and how much you paid, so adding on gap insurance is unnecessary.

Do your homework
If there were just one type of gap cover insurance to choose from, life would be much simpler. Unfortunately, that is not the case. So you need to do your homework to make sure you are getting the right gap cover insurance for you.

The most typical types of gap cover insurance include:

  • Return to invoice gap

Tops up the pay out you receive from your car insurer to the amount you paid a dealer for the vehicle.

  • Return to value

Pays the difference between your car insurance settlement and the value of the vehicle when you took out the policy, rather than what you paid for it.

  • Vehicle replacement

Bridges the gap between your car insurance pay out and the cost of replacing your vehicle with a new one.

Be dealership cautious
Beware of just snapping up the first gap cover deal you are offered on the forecourt.

That helpful salesperson might be working under commission, and a car dealer will typically have to charge 20% Insurance Premium Tax before they even start talking numbers.

Shop around to see if other insurance providers can offer you a better deal – chances are they can.

Be aware of the small print and exclusions
Know what gap insurance won’t cover before you buy. For example, if you have forked out for any non-standard extras like satnav or speakers, don’t expect to get this back.

Also be alert to the fact you will only be eligible for a gap cover settlement if your insurance is fully comprehensive and your car has been declared a total write-off.

Whatever policy you choose, make sure you know all the key features before you sign, in particular, the following:

  • length of the policy
  • contribution to excess
  • significant exclusions
  • claim procedure
  • cancellation terms

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