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The definition of GAP insurance and how it works?



Having comprehensive car insurance is not enough. This kind of insurance offers adequate protection till the time the car is operational and running. But what happens when you meet with an accident or the car gets damaged beyond repair or is stolen? The normal car insurance that you may have will be of no use in such circumstances. This happens because when the insurer finds that the repairing cost would be much higher than the written down value of the car they consider it to be written off. In insurance parlance this is known as total loss.  The insurer is willing to pay only the written down value of the vehicle, which is obviously just a small part of the total cost that you had paid to buy the vehicle.

Why does the value reduce?

A new car loses almost 20 percent of its value the moment it is driven out from a showroom. This reduction happens due to depreciation and within a period of just three years, a vehicle loses about 60 percent value. The older is the car, lesser is its value. On the other hand, the repayment period of car loans is much higher than three years and this means that the sum of money that you owe at any point of time within the first five years will be much higher than what the insurer pays you for total loss. So, there will always be considerable gap between what you owe to the financial company and what is paid to you by the insurer.  This is when GAP cover comes into play.

What is GAP insurance?

GAP insurance is a financial protection offered to vehicle owners who can purchase the policy at the time of buying or leasing a car. The insurance is structured to take care of the gap that has been described in the above paragraph.  But the amount that you receive from GAP insurance will depend on the type of policy that you take. The difference could be calculated between what the insurer pays you and any one of the following:

  • The amount that you still owe to the lender.
  • The cost that you paid for the car.
  • The cost of a new car at that point of time.
  • For leased vehicle, the amount that you have to pay the company that had leased out the vehicle.

How it works

The insurance comes into force only if the insurer finds that the cost of repair exceeds the value of the car on the date of damage and declares it as total loss, accepting the liability of paying the value of the car only. Suppose you purchased a car for 20,000 GBP and meet with an accident after three years when the value of the car has reduced to 8,000 GBP and you owe the lender 12,000 GBP. In this situation, the differential of 4,000 GBP will be paid by the GAP insurer and you pay back the loan without spending from your pocket.

You can stay completely protected from financial liabilities with GAP insurance.



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