Gap insurance

Gap insurance
How it covers your car & whether you need it

The Financial Conduct Authority (FCA), the insurance regulator, has approved certain providers to offer gap insurance, although not all. The FCA identified that some gap insurers were not delivering fair value to their customers. This guide outlines how gap insurance operates, weighs the advantages and disadvantages to assist you in determining whether it’s necessary, and provides steps to help you find the most affordable policies.

What is gap insurance?

When you purchase a brand-new car, it’s well-known that its value depreciates by about a third as soon as you drive it off the lot. Over the next three years, its value typically decreases by around 60%.

If your car is stolen or written off, your insurance company will only pay out its current market value at the time of the claim. This amount will likely be less than what you initially paid, especially if the vehicle was new. As a result, there’s often a ‘gap’ between the insurance payout and the amount you’d need to purchase the same car new (or a comparable model).

This is where gap (guaranteed asset protection) insurance comes in. It covers this financial gap and is readily available from independent providers, usually costing between £100 and £300 for three years of coverage.

In the past, dealerships often sold gap insurance at inflated prices, but following an investigation by the Financial Services Authority, concerns were raised that the cover provided didn’t offer fair value to consumers. This practice has since been addressed.

While gap insurance isn’t essential, your car insurer should already cover the cost of a replacement vehicle of similar age and condition. Gap insurance primarily becomes useful if you’re under a finance agreement and owe more to the finance company than what the insurer would pay.

What does gap insurance cover?

Here are the three primary types of gap insurance, and what they cover varies based on which one you choose:

• ‘Back to invoice’ gap insurance. This covers the gap between the payout from your car insurance if your vehicle is stolen or written off and either the original price you paid or the amount still owed to a finance company.
• ‘Vehicle replacement’ gap insurance. This covers the difference between the amount your insurer pays and what it would cost to buy the car new today, or in the case of a used car, the price you paid at the time of purchase.
• ‘Contract hire’ gap insurance. This applies solely to individuals who lease their car, without an option to purchase it. Your car insurance will cover the vehicle’s current market value, while the gap insurance will take care of any outstanding payments on the lease.

What doesn’t gap insurance cover?

As with any insurance policy, gap insurance comes with certain exclusions. Below are some of the most typical exclusions you’ll encounter with gap insurance:

• To be covered, you must have fully comprehensive car insurance, as a third-party policy alone will not provide sufficient coverage.
• It will only provide compensation if your car is stolen or deemed a total loss by the insurance provider.
• The gap insurance policy will not cover any reductions made by your car insurance company. For instance, if your car insurance company decreases the amount it reimburses due to a missed monthly payment, the gap insurance will not compensate for this shortfall.
• If you’ve made modifications to your car, like installing alloy wheels or a spoiler, gap insurance won’t cover these added features if you need to file a claim. The insurance will only cover the difference between the initial purchase price and the current market value, excluding any aftermarket additions.

Should I get gap insurance?

Deciding whether to purchase gap insurance is a personal choice, and you’ll need to determine if the expense is justified for you.

As mentioned earlier, gap insurance isn’t mandatory since your car insurance should cover the cost of a replacement vehicle of equivalent age and condition to your original car if it’s totaled or stolen, leaving you in a similar position.

However, it’s not uncommon to hear that the insurance payout might seem inadequate to the claimant, especially if it falls short of settling the remaining loan balance on the vehicle. To aid in your decision-making, consider the following key factors…

Gap insurance might be useful for you if…

• You want a brand new replacement car. If you’re determined to purchase a completely new vehicle in the event that yours is either stolen or declared a total loss, gap insurance might be a good option. For instance, if you buy a new car for £30,000 and it’s written off after 15 months, your insurance company will reimburse £18,000, which is its current value. If you’re dissatisfied with receiving this lower amount—despite it being sufficient to replace your car with a similar one—gap insurance could be beneficial.
• You owe money to a car finance company. If you’ve financed your car purchase through a personal loan, gap insurance can be beneficial. This is because, if your car is totaled or stolen, your car insurance will reimburse its current value, but you’ll still be responsible for the amount you initially financed. In the event of a crash or theft, you’re obligated to repay the full loan amount. However, with gap insurance, the coverage would settle the remaining loan balance, so you won’t be stuck repaying a loan for a car you no longer possess.

You don’t need gap insurance if…

• You’d be happy with a replacement car that’s not brand spanking new. If you’re not concerned about the drop in value of your car, purchasing gap insurance may not be necessary. In the event your vehicle is stolen or totaled, your standard car insurance will cover a replacement, ensuring you receive a similar vehicle. The primary advantage of gap insurance is that it reimburses you for the initial amount you spent. For advice on finding an affordable standard car insurance policy, check out our guide on Cheap Car Insurance.
• Your car’s less than one year old and you have fully comprehensive car insurance. Many comprehensive car insurance policies include ‘new car replacement’ coverage for the initial 12 to 24 months after purchasing a new vehicle. If your policy provides this coverage and you are within this timeframe, gap insurance may not be necessary.
• You have a used car (although some with used cars do still buy it). If you’ve purchased a pre-owned vehicle, gap insurance might not be as beneficial. This is because a used car depreciates more slowly compared to a new one. As a result, the difference between the amount you paid and the amount the insurance company will cover is likely to be much smaller, making the gap insurance less valuable or even redundant.

The cheapest way to buy gap insurance

Gap insurance was once widely offered through various channels, typically by car dealerships or specialist brokers (car insurers rarely provide it). However, in February 2024, the Financial Conduct Authority (FCA), the insurance regulator, stepped in after finding that some gap insurers were not delivering fair value to consumers. This issue was particularly noticeable through car dealerships.

Step 1: Benchmark a price via comparison sites

The marketplace landscape has evolved, and the fastest – and often most cost-effective – method to obtain it is through comparison websites. Currently, only two major comparison platforms are providing quotes, but we plan to include additional ones as they become operational.

Comparison site to try

Step 2: Check deals not on comparison sites

Here’s a list of exclusive deals that aren’t available on comparison websites. While we can’t guarantee they’ll always be the best option, it’s definitely worth reviewing them to see if they offer a better price than what you’ve found through comparison sites.

Top deals comparisons miss

Important. Bear in mind that we have little feedback on this, and other firms. If you use one, or you’ve had a good experience with a company we’ve not mentioned, please let us know.

How to complain about your insurance provider

The insurance sector often struggles with customer service, and while some providers may meet expectations, others can be a nightmare. Frequent issues include delays or refusals in claim payments, unjustified fees, or undisclosed exclusions in fine print. It’s usually a good idea to start by contacting your provider directly. If that doesn’t resolve the issue, you can turn to the free complaints tool Resolver. This tool assists in managing your complaint and, if necessary, facilitates escalation to the Financial Ombudsman Service at no cost.