We’re often telling people to be wary of a Motor Dealer offering Free GAP insurance. In return we’re often laughed at by people who believe we’re just being alarmist with a view to lining our own pockets. But it really is the case that Free GAP insurance from a Motor Dealer should be approached with some caution.
Why? Read on…
How it plays out
What happens is this:
- The car salesperson offers you GAP insurance for say, £400
- You decline it
- They offer to provide it to you free of charge instead
- You accept it… because free of charge is great yes?
Well, actually, it’s not always great, no!
The cause of the problem
When a Motor Dealer provides GAP insurance to you “free of charge” what usually happens is that the GAP Insurance premium is reflected at full price on your sales invoice whilst the price of the car is reduced by an amount of money equal to the cost of the GAP insurance (or equal to the level of discount they agreed to take off the price of the GAP insurance).
So for example, continuing with the example of a £400 GAP insurance policy that is subsequently supplied free of charge:
| What you’d expect to see on the invoice
| What would normally show on the invoice
|Price of vehicle||£30,000.00||Price of Vehicle||£29,600.00|
|Price of GAP insurance||£0.00||Price of GAP insurance||£400.00|
|Total Price||£30,000.00||Total Price||£30,000.00|
Now… both result in you paying (in this example) £30,000 all in, so there’s no problem here… is there? Well, yes there is.
The sad fact is that most people would carry on regardless entirely unaware that there was any issue with this whatsoever… but, in the event of them needing to make a claim on their GAP insurance policy, they’d find out that they were being short-changed by £400.
What is the problem?
The issue is due to the type of GAP insurance policy that most motor dealers sell – Invoice GAP insurance.
In the event of your car being written off, Invoice GAP insurance (putting aside any finance agreement concerns for the sake of an easy example) aims to pay the difference between your motor insurance payout and the original invoice price that you paid, after discount, to put the vehicle on the road when you first bought it.
The GAP insurance policy won’t cover the cost of itself so, the key is the “after discount” bit. Because in example A, an Invoice GAP insurance policy would be aiming to pay the difference between your Motor Insurance payout and the £30,000 purchase price. Whilst Example B would see the policy aiming to pay the difference between your Motor Insurance payout and the £29,600 purchase price. In other words, that “free” GAP insurance policy ends up costing you (in this example) £400 at the time of any subsequent claim.
“Free” suddenly doesn’t look so appealing does it? Now consider that we regularly see Motor Dealers trying to charge up to and in excess of £1000 for an Invoice GAP insurance policy and you can no doubt imagine that people are being unwittingly (and in some cases, considerably) stung by this far more frequently than they should be.
There’s two possible solutions:
- FREE means FREE – Make sure the paperwork matches the deal you struck.If the dealer offers you GAP insurance free of charge, make sure that the GAP insurance policy is reflected as having been supplied FREE OF CHARGE!Then again, where’s the fun in that? Which leads me to our favoured solution…
- Play the system and profit from itThis needs some explaining (see below), but in a nutshell it involves cancelling the GAP insurance policy supplied by the dealer, claiming a refund of unused premium and then using part of that refunded amount to purchase a superior policy from an independent provider such as GapInsurance.co.uk.
All GAP insurance policies whether bought from a Motor Dealer or independent provider include a cooling off period within which you can (for any reason whatsoever) cancel the policy and receive a full refund of the premium your Policy Schedule shows that you paid for it (you can no doubt see where I’m heading with this by now). This cooling off period will be for a minimum of 14 days (your statutory right) but most companies permit up to 30 days. Crucially, in cancelling the policy, although there is a small chance that some tight-fisted providers will charge you a small administration fee, they are NOT permitted to penalise you for cancelling the policy (e.g. reversing the discount granted off the price of the car in the first place would almost certainly qualify as a “penalty”) and in any case, cancelling the policy direct with the Insurer by following the “How To Cancel This Policy?” instructions within their policy terms and conditions, would mean you wouldn’t have to get involved with the dealer at all in relation to the cancellation of the policy anyway.
Thus, in Example B above, you would have been issued with a Policy Schedule showing that you had bought a GAP insurance policy for £400. Cancelling that policy within the initial cooling off period by way of the cancellation instructions within the policy, would at best see you receive a full refund of the £400 and at worst see you incur a small admin fee.
By comparison, prices of GAP insurance from the likes of GapInsurance.co.uk can in some cases be up to 85% lower than those charged by Motor Dealers and what’s more, is that we don’t just sell Invoice GAP insurance, but also the superior Replacement GAP insurance policy which, in the event of a claim (and still usually for far less than the cost of the dealer’s Invoice GAP insurance policy, will aim to pay the difference between your Motor Insurance payout and what it would cost at the time of claim to replace your vehicle with a brand new equivalent* even if that costs more than you bought the vehicle for first time around!
In other words, you can cancel the dealer’s Invoice GAP insurance policy, claim a refund of unused premium and for normally less (and in many cases, considerably so) than the amount of refund you receive, buy a superior Replacement GAP insurance policy from GapInsurance.co.uk that pays out to a higher figure by default (therefore negating the discount you got off the vehicle purchase price originally) AND end up with money in your pocket too!
A Real World Example
I’ve just come off the phone to a customer (it’s what encouraged me to write this blog).
On September 1st 2016, she replaced her vehicle and frustratingly, had forgotten to cancel her policy with us (not to worry though, we can back-date the cancellation).
At the time she changed her vehicle, to clinch the deal, the supplying dealer offered to throw in a 3 year Invoice GAP insurance policy entirely free of charge (part of the reason she never contacted us and then forgot about her existing policy). I encouraged her to dig out the paperwork and talk me through the figures on the invoice from the dealer.
This is where it gets interesting…
Her invoice showed that she’d paid an eye watering premium of… wait for it… £824 for a 3yr Invoice GAP insurance policy.
Let’s just dwell on that for a moment… £824! If it’s not daylight robbery that they can even contemplate such a high premium in the first place for a THREE year Invoice GAP insurance policy, I don’t know what is. Even at full price our equivalent top-of-line highest-possible-claim-limit Invoice GAP insurance policy was only circa £170 (almost 80% cheaper)! Alas that’s a whole other rant!
However this policy from the dealer, had been in force since 01/09/2016. She mistakenly thought that she wouldn’t be able to cancel the policy and get any refund but, as discussed above, she can. With the policy having been in force since September 1st I calculated that based on a daily pro-rata rebate calculation (which we use with our policies… some motor dealers still use a monthly pro-rata calculation) the amount of rebate she’d be due would be somewhere in the region of £700. There’s always the prospect of a cancellation/administration fee being imposed on her though so I told her to bank on say £650 (anything more would be a bonus).
We then looked at how much a Replacement GAP insurance policy from us would cost (remember her policy from the dealer was the inferior Invoice GAP insurance policy) for 3 years… even our top-of-the-line highest-possible-claim limit came in at only £195! (that’s ~76% cheaper for superior cover)
In short, I calculated that if she cancelled the dealer-sourced GAP insurance policy, she’ll be receiving a refund of up to £650. She’ll then be able to buy a superior policy from us for £195 and will end up with something in the region of £455 in the bank/her pocket!
Not surprisingly, the customer is now pursuing the cancellation of the GAP insurance policy she sourced from her dealer and will shortly receive her pro-rata refund.
As it happens, in this case the customer elected to not just extend her cover with us to 4-years, but also to take advantage of the ability to defer the start date of the GAP insurance policy until September 1st this year because her Motor Insurer covers her on a “new-for-old” basis during the first year anyway.
This 4-year policy covering the 2nd, 3rd, 4th and 5th year of her ownership of the vehicle costs £249 although being a long-standing customer I agreed to discount it to £224.
Of course, those of you with an eye for detail will spot that IF she receives £650 back from the dealer’s GAP insurance policy she’ll have effectively spent £174 on the time period that’s passed already (£824-£650 = £174). If you add that to the £224 cost of our policy, she’ll have effectively paid £398 in total for her GAP insurance cover but, there’s a few things to keep in mind here:
- If she’d contacted us within the initial cooling off period of the dealer’s policy we’d have encouraged her to cancel immediately and she’d likely have received a refund of the full £824 that the dealer charged her.
- She’s getting a whole new 4 year, superior, Replacement GAP insurance policy from us (which will pay out to a higher figure than the Invoice GAP insurance policy she sourced from the dealer) which will start on the anniversary of the day she took ownership of the vehicle.
- Thus, she’ll technically have had GAP insurance in force (by the end of the policy) for 5 years!
- £423 for FIVE years cover is still, considerably cheaper than an utterly absurd £824 for THREE years of cover, especially when you consider that the dealer’s Invoice GAP insurance policy didn’t take in to account the fact the she already has cover for the first year from her Motor Insurer and as a result, some would argue that it was actually, just a TWO year policy!
Still want that free GAP insurance from your Motor Dealer?
Not at £824 you don’t!
To be fair… not all dealers try to charge such absurdly high premiums for GAP insurance but the basic principle is still the same…
If a dealer has offered you GAP Insurance for FREE or even at a discounted price it’s important that you do one of two things:
- Make sure the paperwork matches the deal you were offered, or
- Avoid buying GAP insurance from the Motor Dealer altogether. Buy from an indpendant provider such as GapInsurance.co.uk
If you don’t do either, you WILL lose out.
It’ll come as no surprise that I favour option 2 – it may be a strong opinion but, buying GAP insurance from a Motor Dealer is almost NEVER a good idea.
Call us on 01943 850999 or email firstname.lastname@example.org if you have any questions.
* – Assuming your original vehicle was bought brand new. Replacement GAP Insurance IS available for used vehicles up to 10 years old at the time of buying the policy. At the time of any claim on a policy covering a used vehicle the replacement vehicle value is determined in reference to the cost (at the time of claim) of replacing the vehicle with one of the same (or nearest equiivalent) make, model, specification, age and mileage as was relevant to your original vehicle at the time you first bought it. Please contact us for more details.