GAP (Guaranteed Asset Protection) Insurance and its merits when buying a car on finance

I am thinking of buying a new car on finance but the hire purchase company is very keen I should spend about £200 extra on what it calls GAP insurance which it says will protect my losses if I have an accident and the vehicle is written off or stolen and the insurer offers me the trade price when I will need to pay the retail price for a replacement. Can you advise what this is all about and what the benefits are to me?

You will not be able to claim the shortfall as a result of your uninsured loss recovery - you would need to have a special policy in place to cover such losses or replace the vehicle.  The policy is commonly known as GAP insurance which stands for Guaranteed Asset Protection.

This kicks in when your vehicle is stolen or written-off because your insurance company will usually pay you whatever it's worth to the trade. This means that it will not always cover the cost of an equivalent replacement car as the difference between trade and retail value includes the trader margin.

GAP insurance covers the shortfall between the amount you paid for the vehicle and the insurer's valuation and a number of different variants are available which are designed to meet different situations road users might encounter:

Back to invoice GAP insurance means that if your vehicle is stolen or written-off, your GAP policy will refunds the difference between what you paid for it and what your insurance company value your vehicle at.
Say you paid £30,000 for your vehicle and after two years your insurance company values it at £18,000, GAP insurance will refund the difference of £8,000 to you directly.
Price paid: £30,000  
Insurance valuation: £18,000  
Shortfall covered by Back to Invoice GAP insurance: £12,000

Back to finance GAP insurance works on the same principle but it will only refund any difference between the insurer's valuation and the outstanding finance on the vehicle.
So say you paid £15,000 for your vehicle and have £9,000 of outstanding finance but your insurance company only values it at £8,000, GAP will refund the difference of £1,000 between the outstanding finance and insurance valuation.
Price paid: £15,000  
Outstanding finance:: £9,000  
Insurance valuation: £8,000  
Shortfall covered by GAP: £1,000

Numerous GAP variants are available but one of the most popular is a 'new for old' policy, which will replace your vehicle with a new model, as long as it is under a certain age and covered less than a stated mileage.

Cover varies depending on who you buy GAP Insurance from, but most will cover you for three years with a one-off payment, and is available for both new and used vehicles. It is available whether your vehicle was bought on finance or by cash.

Prices vary widely and you should shop around.

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