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GAP insurance can provide financial protection during the first few years of your cars life, particularly if you have financed the purchase using car finance, such as hire purchase or leasing. If your car is written off due to accident damage or theft, a GAP insurance policy will pay the difference between the true value of your vehicle and the outstanding finance settlement figure on your hire purchase or lease agreement. Generally, a GAP insurance policy will provide cover in the event of an accident or theft where the vehicle has been written off by the insurance company. You may be under the illusion that

 your motor insurance policy will cover you in the event of a claim! In many cases, fully comprehensive insurance will only provide cover up to the actual market valuation of the vehicle. In many cases, this could leave a substantial gap between the original purchase price and the insurer's valuation! In addition to accidental damage, your vehicle could easily be written off as a result of theft. If you do have a finance agreement on your vehicle your insurance company will base their valuation on the current

 Glass's Guide book price at the time of the claim. Therefore, the resultant valuation will be significantly less than the actual price paid at the time of purchase with the gap increasing as the car gets older. To compound this even further, the insurance company valuation could be much lower than the outstanding finance balance on your agreement, leaving you to pay any shortfall once the claim has been paid. For example, let's assume that you have purchased a new car at a cost of £15000 - a fairly modest price in today's market! Two years later the car is written off due to theft. Your insurance

 company offer you the current market value, which happens to be £7000. You've just lost £8000! You might think that the valuation is a little harsh, when in fact it represents the average depreciation over a two year period for many of the most popular cars on the roads today. However, if you had taken out a Vehicle Replacement Gap Insurance policy your financial loss would be zero as the policy would provide a replacement vehicle up to the original purchase price. To make matters worse, if you have

 taken out a loan to buy your car you could find that the gap between the finance settlement and the insurer's valuation could be significant! Remember, once the insurance company has written off your vehicle you are liable for any outstanding finance and are therefore solely reliant on the cars value clearing the finance amount, which in today's market is unlikely to be the case! Here's a quick example of how GAP Insurance works with a car purchased on finance: You purchase a car at a cost of £18000 and drive it away from the dealer's showroom. After putting down a deposit of £2000 you borrow

 £16000 over a 5 year period at an APR rate of 8%. Your repayments are £319.93 per month. The total amount payable on the finance agreement is £19196 plus your initial deposit making a total of £21,196. 12 months later you have an accident and your insurance company declare your car a total write-off. You still owe the finance company £14000 and your car is now worth only £12000, based on an

 average monthly depreciation of £500. At this point you owe more on your car than the market value! A GAP insurance policy will pay the difference between the finance settlement amount and your insurance company's valuation, which in this example would be £2000. Not all GAP insurance cover is the same as policies may vary from basic cover that bridges the gap between the original invoice price

 and the insurance valuation to far more comprehensive (and worthwhile) Vehicle Replacement Gap Insurance cover that provides cover for a replacement vehicle in the event of a claim. Article Source: http://EzineArticles.com/4947507