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

If your car is stolen or written off, most car insurance policies will only pay out its current market value, not the amount you paid for it. When you consider that the average new car loses around 40% of its value by the time it’s a year old and 60% once it’s three, it’s clear 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 (return to invoice, or RTI, cover) or the amount you’ll need to buy a comparable new replacement (vehicle replacement cover). It also pays off any outstanding finance or lease payments.

In theory, GAP insurance is a good thing, but most people are paying too much for it because they’re buying it from dealerships rather than going directly to insurance companies. GAP insurance is bought by around 26% of new car buyers, and 91% of those do so through dealers. According to the Financial Conduct Authority (FCA), more than half of GAP insurance fees on these policies go to the dealership as commission.

What’s being done to make GAP insurance bettr value for consumers? 

Car dealers may soon be prevented from selling GAP insurance, due to the latest action by the Financial Conduct Authority (FCA), which regulates insurance providers. 

It has been trying to make the GAP insurance products dealers sell to car buyers better value for some years. In September 2023, it wrote to insurance companies selling GAP to remind them of their obligation to provide good value to their customers. It warned them that if they didn’t demonstrate that customers were getting a fair deal within three months, it would take further action. 

The reason the FCA is acting is that, according to its latest data, only 6% of the amount customers pay in premiums for GAP insurance is paid out in claims. However, some insurers have paid out up to 70% of the value of premiums in commission to those selling the cover, such such as motor dealerships. 

The result of the FCA’s warning, according to a report by Car Dealer, is that some insurers are already withdrawing the product from sale.

Although this may be bad news for car dealers, it’s good news for consumers because they’ll still be able to buy cover that’s better value direct from online providers. 

How much should you pay for GAP insurance? 

To find out just how big the difference is between the prices charged by dealerships and insurance companies, we got GAP insurance quotes for four popular car models: the BMW X5, Kia Sorento, Seat Leon and Volvo XC40.

According to our research, GAP insurance can cost up to 61% more from a franchised dealer. The dealerships we approached offered (return to invoice (RTI) policies only, which pays out either the amount you paid for the car or the outstanding finance on it if it’s written off. We obtained quotes for this level of cover from online insurers and franchised dealers.  

GAP insurance for all four of the cars we researched was significantly more expensive from a dealer. In all four instances, it was cheaper to buy vehicle replacement cover from insurers than it was to buy RTI cover from dealers.

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

Should you buy GAP insurance?

You don’t have to buy GAP insurance at all, and the likelihood of you having to claim on it is very small. Only 1% (384,000) of the UK’s 33 million cars are written off each year, and many of those are older vehicles that are scrapped because they would cost too much to repair.

You might not need GAP insurance for the first year after buying a new car, because many car insurance policies will provide a replacement if the car is written off in that time anyway.

If you do want to buy it, doing so sooner is better, because some GAP insurance providers will only sell cover for cars that are less than three months old. In those instances, they should allow you to defer the cover for a year.

There are certain situations in which GAP insurance could be worthwhile, whether you’re buying a new or used car. They are:

1. Bought on finance

If you’ve bought your car on finance by signing up to a personal contract purchase (PCP) scheme, using hire purchase (HP) or taking out a large personal loan, GAP insurance will cover the big shortfall you could struggle to make up if the car is declared a total loss.

Get a GAP insurance quote now >

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 taken out a long-term lease for a car that is subsequently stolen part-way through the lease. You could be landed with a hefty bill for any outstanding payments, 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?

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 prevent you 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.

What Car? says…

The FCA tried to tackle the problem of car buyers paying too much for GAP insurance in 2015 by making it compulsory for showroom staff to give car buyers a two-day cooling off period after informing them about products such as GAP.

However, follow-up research by the FCA in 2018 showed the change reduced the number of policies sold overall by 23% and had a marginal reduction in the proportion sold by dealers.

So, the latest move from the FCA will be good news for car buyers if it either reduces the commission dealers earn from policies or stops them from selling the cover, because car buyers should still be able to find better value policies elsewhere. 

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