Before working out whether you require Gap Insurance for high value motor lets first take a look at the facts. We have all heard a million times that a car loses a large chunk of value when it is driven off the forecourt. With standard motor vehicle policies the sum insured is not the ‘purchase price’ but rather the ‘market value’. When we drive out of the showroom the market value is significantly lower than the purchase price.
The problem is that if we have an accident, or the car is stolen, soon after purchase we could be left with a shortfall in the amount of money paid out by the insurance and the cost of a new vehicle. In the case of a vehicle that has been paid for via finance, we could end up owing money for something that we either no longer have or can no longer use.
GAP insurance can be taken out to solve this problem and to cover the difference in the market value and the purchase price.
What is GAP Insurance?
GAP insurance, otherwise known as Guaranteed Asset Protection, is a financial product purchased when buying a new car. As an average new car can lose between 10%-20% in value after being driven out of the dealership, GAP insurance covers the difference between this reduction and the cost of a new car. Most insurance companies cover the market value of the car if a total loss occurs, and this will take into account the 10%-20% immediate loss of value. Whether you have paid for the car upfront or purchased through finance, this will likely be a significant drop in value.
When would I need GAP Insurance?
- If you buy a car on finance then a total loss (especially early in the agreement) is very unlikely to pay off the outstanding loan. This could potentially leave you without a car and with an outstanding finance deal at a high rate of interest. You would be more vulnerable if you paid a low deposit, or if you have a large balloon payment to make at the end of the agreement.
- If your particular car make/model depreciates quickly then you could be significantly out of pocket in the event of a total loss. Some cars depreciate as much as 60% in the first year; therefore a GAP policy could end up paying the thick end of a claim amount.
When might GAP Insurance not be required?
- If you can afford to make up the difference in the event of a total loss and you would rather self insure.
- The vehicle is second hand and the depreciation is at a much lower level (there are exceptions to this as some cars can increase in value i.e classic cars and limited editions etc…).
- If an insurance policy offers new car replacement (please see below).
Is there an alternative to GAP Insurance?
There are motor insurance policies out there that will cover a new replacement car in the event of a total loss. However, it is wise to read the small print as some policies will exclude theft and fault claims. In these instances, it may be that the GAP cover is still the best option.
So in principle GAP insurance seems like a good idea. This is especially the case if you are purchasing a high value vehicle as the difference between the purchase price and the market value can be significant. However, it is often the case that someone purchasing a high value vehicle has a portfolio of other high value items that also require insuring. In this case, we are talking about a high net worth individual and separate policies could be used to supersede and avoid the need for GAP insurance altogether.
High Net Worth Vehicle Cover
Some High Net Worth insurance companies go further than the above and offer new car replacement for new vehicles up to 3 years old. For the right type of vehicle, a High Net Worth Insurance policy may also be competitive, as well as offering this extension of cover. With the difference in price between the market value and purchase price being so much larger in the case of a high value vehicle, the cost of GAP insurance can be significant. GAP insurance can be very expensive and this should be factored in when considering your insurance options.
High Net Worth Insurers such as Chubb, Azur, Zurich Private Clients, Hiscox and Aviva Distinct offer agreed value policies. These policies will (if set up on an agreed value basis) pay the agreed value of the car irrespective of whether a total loss occurs on day 1 or day 365 of a policy, if a total loss occurs.
Some of these High Net Worth policies go even further than this. If a new vehicle suffers a total loss within the first 3 years of a policy (depending on which Insurer you are with) then a new replacement vehicle will be available.
Here at McLeod Insurance we offer a tailored approach that is different for every client. High net worth clients are very individual and no two cases are the same. We will seek to cover all your assets as efficiently as possible and often this means we can place your business within a high value insurance policy that offers an agreed valuation for your vehicles and thus avoids the need of GAP insurance. When you have a little more to insure it is even more important to seek out an experienced high net worth broker.
GAP insurance can be an unnecessary expense
At McLeod Insurance, we make certain that you have the correct cover in place and whilst GAP insurance can be useful for some customers, we will ensure that you do not replicate existing cover. We can arrange a high net worth policy that gives you an agreed valuation for your vehicle and therefore renders GAP insurance an unnecessary expense.