What is GAP insurance and how much should you pay for it?

Nine out of 10 new car buyers are paying too much when they take out GAP insurance, which covers the full cost of replacing the car after an accident or theft. We take a closer look...

What is GAP insurance and should you buy it?

If your car is stolen or written off, your insurance will pay out only its current market value, not the amount you paid for it. When you consider that the average car has lost around 40% of its value by the time it’s a year old and 60% once it’s aged three, it’s clear to see that you could end up seriously out of pocket. 

That’s where guaranteed asset protection (GAP) comes in. It’s an additional form of insurance that runs alongside your standard policy, covering the difference between the amount your main insurer will pay out and either what you paid for the car or the amount you’ll need for a comparable replacement. 

What is GAP insurance and should you buy it?

It also covers the cost of any outstanding finance payments for which you may be liable after your car has been declared a total loss.

GAP insurance is generally sold for cars up to 10 years old, and cover is available for one, two or three years. Although it can be purchased for both new and used cars, in general, it is more useful for cars up to three years old, because this is when they lose value quickest.

Should you buy GAP insurance?

However, there are certain situations where GAP insurance may be worthwhile whether you're buying a new or used car:

1. Bought on finance

If you’ve bought a car using finance or a large personal loan it will help to cover the big shortfall that you’ll struggle to make up if the car is a declared a ‘total loss’.

2. Bought a car that'll lose value fast

If the car you’re buying is one that will suffer steep depreciation, taking out GAP insurance is sensible because it will help to make up the difference between the insurance payout and the potentially sizeable cost of replacing the car.

3. Bought on a lease

If you’ve bought a car on a long-term lease and it’s stolen, you could be landed with a hefty bill for outstanding finance – as well as the cost of replacing the car – so GAP insurance will help to protect you in this scenario.

GAP insurance - what should you watch out for?

So, where should you buy GAP insurance? The salesperson is likely to offer you GAP insurance when you buy a car, but it’s also available from numerous insurers, brokers and comparison websites and these are often cheaper, so shop around before you buy.

The five key things to look out for are: length of cover, excess, any exclusions, claims process and cancellation process.

If one policy looks far cheaper than the others, check that the cover isn’t restricted by a very short limited claim period. For example, there are some that stop you from claiming if your car is stolen and not recovered within a period of as little as 30 days.

Pre-approval is something to watch out for, too. It stops you from accepting an offer from the car’s main insurer without the consent of the GAP insurer, and could be used by the GAP company to delay its payout to you by repeatedly rejecting the insurer’s offers.

It’s also important to note that car dealers are no longer allowed to sell you GAP insurance on the same day they sell you a car; they now have to wait for at least two days before offering it to you, and they have to explain the total cost of the policy you’re being offered, as well as the key benefits and exclusions on it.

What is GAP insurance and should you buy it?

They must also tell you that you can purchase cover elsewhere. This is because the Financial Conduct Authority (FCA) became increasingly concerned in 2015 that dealerships were selling overpriced GAP insurance without clearly explaining the product to their customers.

Follow-up research by the FCA in 2018 showed the changes have had an effect on quite a few new car buyers, with a 23% reduction in the number of policies sold and a marginal reduction in the proportion sold by dealers.

However, dealers’ prices haven’t noticeably reduced. Plus, GAP insurance is still bought by around 26% of new car buyers, with 91% of those buying through dealerships, rather than directly from independent suppliers. And, according to the FCA, more than half of GAP insurance fees go to the dealer as profit.

How much should you pay for GAP insurance? 

Our research reveals that in every instance, the GAP cover sold by franchised dealers costs far more than that offered by independent insurers. In two instances, the price is more than three times higher, and all four policies we’ve examined cost more than twice as much when bought from a franchised dealer. 

Two of the most popular GAP products are ‘back to invoice’, which covers the difference between your insurance payout and the car’s purchase price if it’s declared a total loss, and ‘vehicle replacement’, which provides enough for an equivalent new car even if its price has gone up since you bought your previous one.  

Given that ‘back to invoice’ is the most widely purchased type of GAP insurance, we looked at 36-month quotes for this on four highly-rated new cars in order to compare the prices charged by franchised dealers and online providers. We chose only policies that would also cover any early settlement fees payable to a finance company that aren’t covered by the insurance payout.   

The biggest difference was for a Range Rover Evoque; Lancaster Land Rover in Slough wanted £499 for three-year cover, whereas the same deal from GAP Insurance was just £175. Our other dealer quotes were from Stephen James BMW of Bromley, Bristol Street Motors Ford in Bromley and Citygate Skoda, Slough. 

Cost of a three-year GAP policy for a new car

Car Range Rover Evoque Ford Puma
List price £39,015 £23,645
Admiral £246 £176
ALA £263 £195
Direct Gap £199 £159
Insure The Gap £179 £129
GAP Insurance £175 na
MotorEasy £239 £153
Total Loss Gap £192 £158
Franchised dealer £499 £449
Biggest difference £324 £320

What Car? says…

It’s clear that more needs to be done to prevent new car buyers from paying over the odds for GAP insurance. But in the meantime, vote with your feet: don’t buy a policy from a franchised dealer without first checking prices for comparable cover from a range of independent suppliers. And if you do decide to buy, read the terms and conditions fully to check that there aren’t any nasty restrictions. 

For all the latest reviews, advice and new car deals, sign up to the What Car? newsletter here