Gap Insurance : Coverage, Benefits, Who & When You can Buy

Buying a new car is always a feat to celebrate. Whether it is your first car or an addition to the long streak of vehicles you have bought before, it is still going to be special. Although, it often is the case that the one car that you want to buy today is just a little out of your budget. It can be a little difficult to reset your heart and mind on a more budget-friendly model. But thanks to the extensive leasing and financing options available in the UAE, you can easily get the car you want. Gap insurance comes in the picture right after you are handed over with the keys to your new car. Gap insurance coverage is an optional coverage offered with car insurance plans. It helps in covering the gap between the market value of your car and the total lease amount due to the bank if your car goes in total loss.

What is Gap Insurance?

Gap insurance coverage or guaranteed asset protection insurance is supplementary or optional insurance coverage that pays off the difference between the market value of a totalled car and the loan amount due. If your car has been stolen or damaged in an accident beyond repair, it is declared as “totalled” or “total loss” by the insurance company. Here, if you have a comprehensive car insurance plan, the insurance company will pay you the market value of the car. However, let’s assume that you got the car financed when you bought it. Now, there is a fair chance that the car loan amount due to the bank will be much more than the amount insurance companies pay you. If you have gap insurance, this difference will be paid off by the provider and you will suffer no loss.

How Does Gap Insurance Works?

To understand the workings of Gap insurance coverage quickly, let’s assume a scenario:

• You financed your car with a 20% down payment and the showroom price of the car was AED 10,000.
• The interest rate on your car loan is 10% and you choose a tenure of 60 months or 5 years.
• The generic depreciation a car accumulate in one in UAE is 20-30%. Assuming your car accumulated 20% depreciation, the new value will be AED 8,000.
• If the car goes into total loss now, the insurance company will only pay you AED 8000.
• As per the tenure, interest rate and principal, the total amount you owe to the bank after paying one yearly instalment will be AED 12,000.
• This gap of AED 4000 between the loan amount due and the amount received by the insurance company is paid off by gap insurance.

Why Do You Need Gap Insurance?

The simple reason why anyone would need gap insurance is – depreciation. Cars or any kind of motor vehicle lose their value very quickly as soon as they are out of the showroom. General statistic show that your car may lose over 20% of its original showroom value within the very first year of purchase.

Now, if you are someone who had put a small deposit as a down payment and financed the rest amount, you will need gap insurance. If your car goes into total loss now after the financing, the insurance company will not pay equivalent to the showroom price. You will need gap insurance to cover the difference between the amount paid by the insurance company and the total loan amount due. Do not forget that interest rates are also a part of this equation.

When Can Gap Insurance be Beneficial?

There are several different scenarios when a gap insurance cover may come in handy. Given below are the top picks:

• If you have financed the car for a long tenure – 60 months or more.
• If you have financed the car with zero or very little down payment – 20% or less.
• If the car you have financed depreciates very quickly. Some examples here can be SUVs, luxury cars, etc.
• If the car you have does not have a good resale value.
• If you plan to drive your car a lot. The more miles you put on your car, the more it will depreciate.
• If you have a rollover loan. Assume you have some amount remaining on your car loan and decide to buy a new car. Here, the dealerships sometimes roll over the remaining loan amount for the old car to the loan amount of the new car.
• If you leased your car.

Who can Buy Gap Insurance?

The following is the basic eligibility criteria to buy gap insurance coverage in the UAE

• The lease of the vehicle or the car loan is under your name.
• You are a UAE resident or citizen.
• The car is registered under your as well.
• You already have a comprehensive car insurance policy for your vehicle along with collision cover.

Another additional thing you need to look for is the age of your vehicle. The criteria for the age of the car can differ for every Gap insurance provider. So, make sure that you check with your insurance provider for the allowed age of the car. Also, note that both new and second-hand car owners can buy this cover.

What is Covered in Gap Insurance?

Every kind of insurance policy comes with a set of inclusions and exclusions. The same is the case here with gap insurance coverage. Gap coverage will pay up if your car gets totalled because of one of these reasons:

• Collision with another vehicle or an object
• Vandalism damages
• Stolen beyond and is beyond recovery
• Damaged by included natural disasters such as storms
• Damaged by included man-made disasters such as terrorism and riots

Some insurance providers add another layer of benefit to the Gap insurance and provider a cash benefit along with covering the gap.

What is Not Covered by Gap Insurance?

The only time gap insurance coverage will come into effect is if there is a difference between the insurance amount received for a totalled car and the loan amount due. Any other kind of incapability to pay off the loan amount for the financing or leasing of the car are considered as exclusions for gap coverage. For example,

• if you are in between jobs at the moment and cannot pay car loans. Gap coverage will not cover the costs in such situations.

Apart from that, there can be some other additional exclusions such as:

• Vehicles that are used commercially
• Vehicles that have been modified
• Vehicles used for competitions like car racing
• Vehicles that are used for hiring purposes such as delivery vehicles, school rides, etc.
• Vehicles that cross the weight limit/maximum showroom price/age set by the insurance provider.

When Can You Buy Gap Insurance?

Technically, there is no set time to buy a Gap insurance cover. However, most insurance providers set a certain time limit. The reason for that is simple. The older your car is, the more it depreciates and equally faster too. This can increase the risk of a car getting totalled even by a small accident. Also, the older the car is, the bigger the gap between the market value and loan amount due will be.

The generic time limit insurance companies set on buying Gap insurance is 2-3 years after you purchased the vehicle. Some insurance companies even extend the limit to 5 years. Both new and second-car owners can buy Gap insurance coverage but it also depends on the services available with providers. 

Things to Keep in Mind

• Gap coverage can only be claimed once when your vehicle either meets total loss or gets damaged so much that the repairs cost more than its market value.
• Gap insurance can be renewed. However, you must calculate the difference between the loan amount due and the market value of the car every year before renewing gate insurance. If the difference is negative, something you can afford or less than the premium amount, there is no need to renew the plan.
• Make sure that the lease contract drawn for the car does not have gap insurance included in it.
• Some insurance companies include gap insurance coverage as an add-on benefit or endorsement. See if your plan also has this option to include the option to take gap insurance as an add-on.
• Firmly check the cancellation clause. Once the market value of your car is higher than the loan amount due, you will not need gap coverage. So, there will be no point in keep paying a premium for it. Make sure the insurance you take can be cancelled at any time you feel like it.
• Many dealerships-cum-insurance companies offer gap insurance only to the vehicles that were purchased from them. If you choose to buy gap insurance coverage from such a provider, make sure you buy it as a separate plan.

The Conclusion

A gap insurance coverage plan is a very handy little tool if you suspect finding yourself in a pickle. But, since it is an insurance plan, it is going to cost you money. SO, make sure that you buy gap coverage only when you need it. Do not forget to drop it when the need for the insurance is not there anymore. Simply by weighing your options carefully and taking a little assistance from the experts at PolicyBazaar UAE, you can easily get the right cover that you need.