After four long, challenging years, Ken has finally graduated from a university and has luckily been able to walk straight into his dream job. His impressive new salary has allowed him to take out a mortgage on an attractive new house in the area of his work. However one thing is missing. Ken believes that his days of roughing it out on public transport are over and instead chooses to invest in the new Vauxhall Corsa.
However graduates like Ken, and let's be honest, the majority of drivers in the UK are simply unaware of how disastrous and in some cases, life changing owning a vehicle can be. According to industry experts, the average vehicle can depreciate by up to 50% within the first three years. And no vehicle is immune to this, not even James Bond's Aston Martin. In addition to this, according to Government statistics, 600,000 vehicles are written off each year in the UK. However despite these figures, drivers continue their day to day affairs without the correct form of protection.
Drivers, like Ken assume that their basic comprehensive insurance will protect them from deprecation rates. This is incorrect. Your comprehensive insurer will only pay you the market value of your vehicle at the time it was written off.
This is where Gap Insurance comes into the scene. Gap Insurance is a supplementary form of Insurance and sits alongside your comprehensive insurer. In the simplest of terms, Gap Insurance will pay the difference between the market value of your vehicle when it is written off and the invoice price originally paid.
The three most populist Gap Insurance policy types are: Return to Invoice, Vehicle Replacement and Contract Hire/Finance Gap.
The most basic form of Gap Insurance is Return to Invoice, as shown here:
- Ken purchases a Vauxhall Corsa for £10,000
- Three years later, Ken is involved in a motoring accident that thankfully leaves him unhurt but his Vauxhall Corsa is written off
- Ken receives a settlement payment of £5,000 from his comprehensive insurer
- This means that Ken now has a total Shortfall or Gap as it is commonly referred to of £5,000
- To be able to purchase another Vauxhall Corsa, Ken needs an additional £5,000
Return to Invoice (RTI) Gap Insurance will pay Ken this outstanding Shortfall/Gap of £5,000 and as the name says, return Ken to the invoice price originally paid for the Vauxhall Corsa.
We Hope that this article has allow you to develop an understanding of Gap Insurance and how important it is to your finances.
