GAP Insurance

When you buy a car it's likely that as soon as you drive it from the supplier it will start losing value.

And the value your insurance company will pay you if the car is a 'total loss' or 'write off' in an accident will typically be less that the price you paid too.

The GAP in value

Let's give an example.

• Your car is new and is valued at £40,000 at that time.
• You have an accident after 18 months and the car is a 'total loss' or 'write-off'.
• At the time of the accident the car is valued at £25,000.

If you took out a finance agreement for the car, let's say that after 18 months you have only paid the finance company £10,000 in monthly instalments.

But now the finance company wants you to repay the full balance of the loan (as the car is a write-off), and you owe them £30,000 (£40,000 purchase price less the £10,000 repayments you have made).

Unfortunately the car is now valued for insurance purposes at £25,000 and that's all the insurance company will you.

So you are now short of £5,000 - a gap between the insurance payout of £25,000 and the £30,000 you owe the finance company.

And this is where GAP insurance should step in.

How GAP insurance covers you

GAP insurance is short for 'Guaranteed Asset Protection' insurance.

If you took out GAP insurance (and subject to the terms and conditions of the policy), GAP insurance should pay you the £5,000 difference between the insurance money you receive (£25,000) and the £30,000 you owe to the finance company.

The precise terms and conditions may vary depending on the GAP policy, but essentially Guaranteed Asset Protection insurance should cover you for the gap between what you owe the finance company and the insurance valuation of the car.

ETI

ETI is short for 'Early Termination Insurance'.

There are typically two types of ETI policies;

1. for individuals who are employed and have taken out a personal finance agreement for a car; or
2. for employees who are in a Salary Sacrifice arrangement.

In example 1 the ETI policy is designed to cover you should you become unemployed due to redundancy.

The policy will typically cover you for making the monthly repayments on the finance agreement until you regain employment.

There may be limitations on the monthy payments or the number of payments that will be covered by the policy.

For example:

• Your car is new and is valued at £40,000 at that time.
• You are made redundant after 18 months.
• You still owe payments of £1,000 per month on the finance agreement for the car but you are now unemployed.

The ETI policy should pay the monthly payments until you regain employment (though there may be limitations on the amount covered by the policy).

In example 2 the ETI policy will typically cover an employer for clearing any early termination payments on a car which is returned early to the finance company.

Typically this happens if an employee resigns before the normal expected period of the finance agreement.

For example:

• After 18 months an employee resigns.
• There are payments of £25,000 still owed on the car.
• The car is worth £20,000.
• The finance company needs £5,000 to balance the shortfall.

The ETI policy should cover the employer for the difference between the value of the car (£20,000) and the £25,000 still owed on the finance agreement.

There are variations in how ETI policies work, but the principle is the same, usually covering either the monthly payments due on the car, or the excess costs of selling the car early compared to how much it is worth.