Gap Insurance Overview

Most car insurance policies will offer a "car replacement" clause within 12 months, covering your new car model if the car you insured originally is wrote off. However, insurers will only cover the current market value of your car, not its original value at the time of insurance. Gap insurance, however, can help bridge the gap between the amount your insurer will pay out and the original cost of your car.

How does gap insurance work?

The principle of gap insurance is quite simple. If you bought a car at £11k and had it insured, but the car was damaged and wrote off 3 years later, the car's market value will have been reduced. Because of this, your insurer will check the current trade value for your car model and only pay out the current market value, not the original £11k. If the value had sunk to £4k, as an example, you may struggle to purchase a new car or pay off any excess finance.

However, if you have a gap insurance policy, the gap insurance would pay the difference (in the example above, £6k). This would mean the original value of your car, from 3 years ago, is returned and your finances are back in order without the £6k gap.

Why would I need gap insurance?

You won't always need gap insurance, but it can be an essential addition to your policy if you:

  • Bought a car with a personal loan or through finance. Usually, finace is spread over a number of years and your original policy may not allow you to pay off the finance, let alone have enough money left over to afford a new model;
  • Have a contract hire deal for a long period of time, where the contract will still be valid and you may have to pay off the rest of agreement, but cannot meet the expectations if your car is reduced in market value and the payout from your insurer is significantly less than the original contract value;
  • Are concerned that you car will depreciate in value considerably and what to bridge the gap should your car be wrote off.

Economics and Gap Insurance

Because of hard economic times, gap insurance is becoming a very popular additional policy for most drivers. A bad economy means a terrible market, especially for cars, and would result in your car depreciating in value quicker than usual. If you have a large, unleaded car, you may want to consider gap insurance, as fuel prices and the economy are hitting hard at these models. Diesal cars and smaller models aren't depreciating as quickly in value, however.

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