How Can Gap Insurance Offer Financial Protection in the event of an Insurance Claim?

GAP insurance can afford financial protection throughout the first few years of your vehicles life

, particularly if you have funded the purchase with car finance, such as hire purchase or leasing.

If your car is written off as a result of accident damage or theft, a GAP insurance policy will pay the difference between the true value of your motor vehicle and the remaining finance settlement figure on your hire purchase or lease agreement.

Normally a GAP insurance policy will provide insurance in the event of an accident or theft where the vehicle has been written off by the insurance company. You may perhaps be under the illusion that your motor insurance policy will cover you in the event of a claim! In most instances, fully comprehensive insurance will only provide cover equal to the actual market valuation of the motor vehicle. In most cases, this could leave a sizable gap between the original purchase price and the insurer's valuation!

As well as accidental damage, your vehicle could easily be written off due to theft. If you have a finance agreement on your vehicle your insurance company will base their valuation on the current Glass's Guide book price at the time of the claim. Hence, the subsequent valuation will be considerably less than the actual price paid at the time of purchase, with the gap increasing as the car becomes older. To compound this even further, the insurance company valuation could be much lower than the outstanding finance balance on your agreement, leaving you to pay any shortfall once the claim has been paid.

For instance, let's assume that you have purchased a new car at a cost of 15000 - a fairly modest price in today's market! Two years after the car is written off due to theft. Your insurance company offer you the current market value, which happens to be 7000. You've just lost 8000! You may well feel that the valuation is a little severe, when in fact it represents the average depreciation amount over a two year period for many of the most common cars on the roads today. However, if you had taken out a Vehicle Replacement Gap Insurance policy your financial loss would be zero as the policy would provide a replacement vehicle up to the original purchase price.

To make matters worse, if you have taken out a loan to buy your car you could find that the gap between the finance settlement and the insurer's valuation could be substantial! Remember, the instant the insurance company has written off your vehicle you are legally responsible for any outstanding finance and are therefore solely reliant on the cars value covering the finance balance, which in today's market is unlikely to be the case!

Here's a quick example of how GAP Insurance works with a car purchased on finance:

You purchase a car at a cost of 18000 and drive it away from the dealer's showroom.

After putting down a deposit of 2000 you borrow 16000 over a 5 year period at an APR rate of 8%. Your repayments are 319.93 per month. The total amount payable on the finance agreement is 19196 plus your initial deposit making a total of 21,196.

12 months later you have an accident and your insurance company declare your car a total write-off. You still owe the finance company 14000 and your car is now worth only 12000, based on an average monthly depreciation of 500. At this point you owe more on your car than the market value!

A GAP insurance policy will pay the difference between the finance settlement amount and your insurance company's valuation, which in this example would be 2000. Not all GAP insurance cover is alike as policies may well vary from basic cover that bridges the gap between the original invoice price and the insurance valuation to far more comprehensive (and worthwhile) Vehicle Replacement Gap Insurance cover that provides cover for a replacement vehicle in the event of a policy claim.

How Can Gap Insurance Offer Financial Protection in the event of an Insurance Claim?

By: gapinsurance997

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