Jill Kerby: Are you buying peace of mind with ‘gap’ insurance?

There are all sorts of ways that financial institutions try to separate punters from their money.

Back in 1986 when my husband and I bought our first house, the building society from which we borrowed the money did some serious arm-twisting to get us to buy a 25 year endowment mortgage.

The repayment would be lower since we would pay interest only on the loan (which was c11% at the time) plus the endowment premium. “It is a good investment and a very popular way to buy a house,” we were told. The investment part of the policy would repay the capital sum at the end of the mortgage term and at maturity we’d have a significant surplus to enjoy.

The huge upfront and on-going sales commissions were never mentioned or how the life insurance part of the policy would get more expensive as we aged, eventually eating into the investment. Or that most endowments were encashed early – at a loss – and that just to break even of all the charges and rising premiums the endowment fund would need an annual growth rate of c7.5%.

I wasn’t writing about personal finance back then and my husband didn’t have a clue either. We probably would have taken out the endowment mortgage if it hadn’t been for the £300 ‘arrangement’ fee the lender demanded…which we simply didn’t have.

It was a lucky break.

Endowment mortgages proved to be terrible ‘investments’, along with the likes of ‘whole of life’ assurance and payment protection insurance (PPI). The latter was still being flogged by the Irish banks and building societies after the 2008 crash, despite the huge multi-billion scandal in the UK. Eventually the Central Bank investigated, found widespread misselling of PPI here and imposed multi-million fines on the industry and compensation for consumers.

Buying a financial product that looks too complicated and is adorned with too many bells and whistles can be a warning signal. This is why smart independent, impartial, trustworthy, fee based financial advisers and good general insurance brokers exist.

Which leads me to the selling of an extra insurance policy that the motor finance companies offer to new car buyers.

I paid cash 12 years ago for my then two-year-old car and it is now only covered by third party, fire and theft insurance and a home assist tag-on. I never heard about General Asset Protection (GAP) motor insurance until a friend mentioned it recently and wondered if it was good value.

She had just arranged a PCP or personal contract plan for a brand new c€45,000 car and the dealer was suggesting she buy a GAP policy worth €30,000, in addition to her standard motor insurance policy.

“They said that if the new car was ‘totalled’ or stolen in the first three years, I would only get its current market value from my insurance. For a once-off payment of €350 the GAP policy would cover any shortfall up the original purchase price of the car and/or the outstanding finance settlement on my PCP plan.”

This is a pretty seductive bell/whistle. Everyone knows that new cars drop quickly in value the moment they’re off the forecourt. She could be stuck with a €15,000 payment shortfall to pay out of her own pocket.

PCP hire purchase plans are hugely popular today and are appealing because they are cheaper than buying a car with a bank loan. Most buyers keep rolling them over for a new car because they come with a big sting in the tail – the final balloon payment that can cost you thousands depending on the age and condition of the car, the mileage you’ve driven, etc.

“Do you really need the GAP,” I asked. “You’re a really good driver. You’ve never had a serious accident. You have three kids and never speed or drink drive and these PCP contracts plans are designed for you to turn the car in for a new one every few years. What are the odds that you’ll end up writing off this brand new, car in the first three years?”

But what do I know? I drive a 14-year-old Almera, so I called insurance expert, Sean O’Connell of The Insurance Shop in Fairview:

“This is 'peace of mind' insurance. I don’t particularly think PCP plans are good value because of the balloon payment, but if your friend did accidentally write off that new car or it was stolen – and this happens all the time, even to good drivers – she would have to come up with the shortfall.

“Is it good value? She has to weigh up a single €350 payment versus the risk of finding €15,000. If she has easy access to that money, then she doesn’t need the cover.”

However, said O’Connell, there are specialist insurers like Chubb who offer motor insurance that includes total loss and theft claims on an ‘agreed value’ – even 100% of the purchase price – for the entire term of the policy.

One policy to cover all possibilities.