How Does GAP Insurance Work?

When your car is written off or stolen, your insurer usually pays out based on its current market value, not what you originally paid. That can leave you out of pocket – especially if the car was new, on finance, or leased. GAP insurance (Guaranteed Asset Protection) is designed to cover the shortfall between your insurer’s payout and the amount you paid, owe, or need to replace the car.

This guide explains what GAP insurance is, how it works, the different types available, and what exclusions to be aware of.

What Is GAP Insurance?

GAP insurance is an optional policy that protects you against financial loss if your car is declared a total loss – usually following theft or an accident. It bridges the “gap” between what your motor insurer pays and what you still owe or need to replace the vehicle.

This is particularly useful if you:

• Bought your car on finance

• Leased the vehicle

• Paid a large upfront amount

• Drive a car that depreciates quickly

Without GAP insurance, you may be left with a shortfall that your main insurer won’t cover.

How Does GAP Insurance Work?

Let’s say you buy a new car for £25,000. After two years, it’s written off in an accident and your comprehensive insurer pays £15,000 – the car’s current market value.

If you bought the car outright, you’re £10,000 short of what you originally paid. If you’re still paying off a finance agreement, you might owe more than that.

A GAP insurance policy would cover the £10,000 difference (or more, depending on the policy type). The money goes either to you or directly to your finance provider to clear the outstanding balance.

Example of GAP Insurance in Action

• Car purchase price: £25,000

• Time of write-off: 2 years later

• Insurer payout: £15,000 (market value)

• Finance owed: £18,000

• GAP insurance payout: £3,000 to clear the finance shortfall

If you bought a policy that covers return-to-invoice, it could pay out the full £10,000, restoring you to the original purchase price.

What Are the Different Types of GAP Insurance?

There are a few key variations, each designed for different situations:

Return to Invoice (RTI)

Covers the gap between the insurer’s payout and the original invoice price. Ideal if you bought the car outright or with a large deposit.

Finance GAP

Covers the difference between the insurer’s payout and the amount you still owe on a finance agreement. Suitable for people with loans or PCP (Personal Contract Purchase) agreements.

Contract Hire/Lease GAP

Covers outstanding payments on a lease agreement, including potential early termination fees. Designed for leased vehicles.

Vehicle Replacement GAP

Pays the difference between your insurer’s payout and the cost of buying a new replacement car of the same make, model and spec. Best if you want to replace the car, not just clear the debt.

Not all providers offer every type, so it’s worth shopping around and checking what’s included.

Are There Any GAP Insurance Exclusions?

Yes, GAP insurance doesn’t cover every scenario. Common exclusions include:

• Claims where the main insurer refuses to pay out

• Theft due to negligence (e.g. keys left in the car)

• Vehicles used for hire and reward, including taxis and couriers

• Cars over a certain age or mileage at policy start

• Negative equity from rolling over old finance into a new deal

• Excess amounts beyond an agreed limit (usually £250 to £500)

You must also usually have fully comprehensive insurance for GAP cover to be valid.

When Should You Buy GAP Insurance?

Ideally, GAP insurance should be purchased when the car is new or nearly new. Many providers require you to take out cover within a certain number of days from buying or financing the car, typically 90 to 180 days.

You don’t have to buy it from the dealership, and you’ll often get a better price from a standalone provider.

Final Thoughts

GAP insurance offers a valuable safety net if your car is written off and your motor insurer’s payout doesn’t cover what you owe or originally paid. It’s especially useful for those buying on finance, leasing, or driving newer cars that depreciate quickly.

Before taking out a policy, check which type of GAP insurance best suits your needs, review the policy limits and exclusions, and compare prices from multiple providers. It could save you thousands in the event of a total loss.