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Using GAP Insurance to Take the Risk out of Insurance

Sep 14th 2016 at 6:07 AM

GAP insurance can ideally provide you an additional financial protection, especially during first few years of your car purchase. This protection becomes essential if you have a finance liability over the vehicle such as hire purchase or leasing.

If your car gets totalled or written off in the first few years due to irreversible damage of theft, GAP insurance can pay the difference between the actual value of the vehicle and the outstanding settlement figure of hire purchase or lease.

The risk of typical insurance in case of write off

Generally, an ideal GAP insurance policy offers coverage in any event of an accident or theft in which the vehicle is fully written off by the insurance provider. If you have an illusion that the vehicle insurance company will cover the entire loss in such cases, it is not so.

In most of the cases, even the comprehensive insurance policies will only compensate based on the actual current market value of the vehicle. In 90% of cases, it will leave a substantial gap between the insurer’s valuation and the original price.

Apart from accidental destruction, your car also may be written off due to theft. Then also the insurance company is going to value your vehicle based on the latest Glass's Guidebook price. Resultant valuation will remain significantly lesser than the real price of the vehicle, which the user paid at the time of purchase.

The biggest risk is that, in most of the cases, the valuation of insurance company will be much lesser than the outstanding balance of the leftover finances on the vehicle. This will ultimately end up in a scenario where the vehicle owners need to pay much higher than actual value of the vehicle as well as need to bear the replacement cost, which will turn out to be a huge financial burden.

For example, imagine you are purchasing a car worth £20000, which is a fairly decent price of an average model car in the market. Two years later, suppose if your insurance provider writes off due to a complete destruction or theft of your vehicle. By that the, the valuation of your vehicle will be about £10000 only. However, in two years’ time, your payment left to the financier may be more than £10000 and you need to bear the replacement cost also by your own.

How GAP insurance covers this risk?

Let’s see how GAP works to help you in such a scenario.

Imagine you purchase a car worth £18000 and made a down payment of £2000 and got a loan for the rest £16000 over 5 years period at an interest rate of 8%. The repayment will be around £319 per month. The total amount payable to the financier will be £19196 plus £2000 makes it a total of £21,196.

Suppose if your vehicle met with an accident after 1 year and the insurance company declare it as totalled. Considering the depreciation, your car may be worth £12000 only by that time where as your actual payment left to the financier is £14000. A GAP insurance can pay you the difference between your insurer’s valuation and the liability in the vehicle, which in the above case will be £2000.


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