This is a question that many people ask when visiting a car dealer and choosing their new car. Once you have decided to buy the vehicle generally a finance manager will attempt to talk you into buying a gap insurance policy. Generally at a far higher price than on-line offerings for the same cover.

To confuse matters further there are different terminologies used for this cover such as shortfall insurance, RTI, VRI, Agreed Value and just plain old gap.

That being said what actually is gap insurance and is it worth buying. Well to answer those questions firstly GAP is an acronym for Guaranteed Asset Protection. Still sounds like a foreign language? Basically gap is a depreciation insurance product for motor vehicles. You cover the difference between what the insurance company will pay out at the point the vehicle becomes a total loss and a fixed amount depending on the type of gap insurance you purchase.

The three main types of gap are RTI (Return to Invoice Gap), VRI (Vehicle Replacement Gap) and Finance Contract Hire Gap.

RTI gap insurance insures the amount between the motor insurance payout and the original purchase invoice price of the vehicle.

VRI gap insurance insures the amount between the motor insurance payout and the cost of replacing the vehicle on a like for like basis when the policy was taken out. This is ideal especially if you know there is going to be a model change of you obtained a significant discount on the list price.

Finance Contract hire gap insurance insures the amount between the motor insurance payout and the amount to settle the finance agreement or contract hire agreement in full.

Is gap insurance worth buying? Well only your perception of risk can answer that question. Let's look at an example. Mr A buys a car for £20,000. He has a no fault accident after two years and the car is written off by his insurance company. They offer him the market value of the car which is now £10,000. For a premium of around £100 he had bought gap cover to provide for the shortfall of the £10,000. Great cover and a low price for this customer. The point of the insurance is that for a small premium you get a large amount of protection if the unfortunate should happen.

Even if you have never written a vehicle off is it worth spending a small amount of money to provide you with a new vehicle if yours becomes a total loss.

Things a little bit clearer now? I hope so. Bear in mind that car dealers are not specialized brokers for this type of insurance. They tend to have a one size fits all policy giving customers only the option to purchase RTI gap cover even if a different policy may be more suitable or offer a better level of cover.