Gap Insurance in Texas 2024: Everything You Need To Know

On average, new cars lose 20% of their value within the first year of ownership. If your car is totaled and you have an outstanding balance on your loan that exceeds the value of your car, you could be stuck paying out of pocket for the difference. This is where gap coverage comes into play. However, it’s important to know that lenders can’t require you to purchase Gap insurance as part of your loan agreement.

Without the right coverage, you risk facing a financial gap that could leave you owing thousands. Drawing from my 15 years of experience as a licensed insurance agent, I’ll guide you through the critical details so you can make an informed decision.

What Is Gap Insurance?

Gap insurance covers the difference between the amount you owe on your car loan and what your insurance will pay if your vehicle is totaled or stolen, ensuring you’re not left with a large financial gap.

When you finance or lease a vehicle, your standard auto insurance typically covers the car’s actual cash value (ACV) if it’s totaled or stolen. However, this payout might be less than what you still owe on the loan or lease, especially if your car’s value has depreciated quickly. That’s where Gap (Guaranteed Asset Protection) insurance comes in—it bridges the “gap” between the ACV payout and the outstanding loan amount, protecting you from potentially significant financial loss.

Without Gap insurance, you could end up responsible for the remaining balance, even though your car is no longer drivable. This coverage is especially important for new cars, leases, or situations where a vehicle’s value depreciates faster than the loan is paid down.

How Does Gap Insurance Work In Texas?

In Texas, Gap insurance functions as a financial safety net for car owners who finance or lease their vehicles. If your car is totaled or stolen, your standard auto insurance will only cover the vehicle’s current market value, not what you owe on your loan.

Gap insurance steps in to cover the difference between your insurance payout and the remaining balance on your loan or lease, ensuring you’re not stuck paying out-of-pocket for a car you no longer have.

Here’s an example:

Let’s say you buy a new car in Texas for $30,000 and finance the full amount. After a year, your car is totaled in an accident. The actual cash value of the car is now $22,000 due to depreciation, but you still owe $27,000 on your loan. Without Gap insurance, you’d have to pay the $5,000 difference yourself. However, with Gap insurance, that $5,000 would be covered, saving you from a large out-of-pocket expense.

What Does It Cover?

Gap insurance covers the difference between the amount you owe on your car loan or lease and the vehicle’s actual cash value (ACV) that your standard insurance pays out if your car is totaled or stolen. This includes situations where your car is involved in a severe accident, is declared a total loss, or is stolen and not recovered.

Specifically, Gap insurance covers:

• The remaining balance on your car loan or lease that exceeds your auto insurance payout.
• Any negative equity, which is the difference between your loan balance and the vehicle’s depreciated value.

What Doesn’t It Cover?

It’s important to note that Gap insurance does not cover:

• The deductible on your regular auto insurance policy (though some policies might offer this as an additional option).
• Mechanical repairs or regular wear and tear on the vehicle.
• Outstanding payments from missed installments or penalties related to the loan or lease.

Therefore, Gap insurance won’t pay out for claims related to the above points.

Average Cost of Gap Insurance in Texas

The cost of Gap insurance in Texas varies depending on how you purchase it—through your auto insurer, a dealership, or a third-party vendor. Generally, you can expect to pay between $20 and $40 per year if added to your auto insurance policy, while dealerships or lenders may charge a one-time fee between $500 and $700 for the life of the loan. Here’s a closer look at the costs based on different factors:

By Vendor

The cost of Gap insurance can fluctuate depending on the source. Some vendors bundle it with auto insurance policies, while others charge a standalone fee. Below is a table showing the average cost of Gap insurance from different vendors.

By Company

Different auto insurance companies offer varying prices for Gap insurance as part of their coverage. The following table provides an overview of the average costs for Gap insurance from major car insurance providers in Texas.

By City

Gap insurance costs may vary by location due to factors such as accident rates and local insurance regulations. Here’s what you can expect in different Texas cities.

By Age

Gap insurance costs can also depend on the driver’s age, with younger drivers generally facing higher premiums due to their risk profile. Here’s a breakdown of average costs by age group.

Gap Insurance VS Full Coverage

While both gap insurance and full coverage broaden the potential reimbursements from your insurance company, they are two different coverages. Gap insurance pays the difference between the actual cash value of your car and the balance of your lease/loan. In contrast, full coverage adds comprehensive and collision coverage to your policy.

Comprehensive coverage pays for damages resulting from things such as fire, theft, vandalism, and collision with an animal. Collision repairs your car if it is damaged from your car making contact with another car or object.

Do I Need Gap Insurance In Texas?

While not legally required, Gap insurance is highly recommended in certain situations where your vehicle’s value depreciates faster than the balance of your loan or lease. Here are some scenarios where Gap insurance can be beneficial:

1. Financing a New Car: New cars lose value quickly, sometimes up to 20% in the first year. If you’ve financed most or all of the car’s purchase price, you could owe more than it’s worth in the event of an accident or theft. Gap insurance would cover that difference.
2. Leasing a Vehicle: Leasing companies often include Gap insurance in lease agreements, but if yours doesn’t, it’s a smart choice to purchase it. Leased cars often come with high monthly payments and fast depreciation, making Gap insurance essential.
3. Low or No Down Payment: If you didn’t put down a significant amount of money when purchasing your vehicle, you’re more likely to owe more than the car is worth during the first few years. In this case, Gap insurance protects you from owing the difference.
4. Long Loan Terms: Loans that extend for 60 months or longer tend to build equity more slowly, leaving you with a higher loan balance compared to the car’s value for a longer period. Gap insurance ensures you’re protected during this time.
5. Rapid Vehicle Depreciation: Some vehicles depreciate faster than others. If you own a make or model that’s known for rapid depreciation, Gap insurance can help protect you from financial loss.

While Gap insurance isn’t mandatory in Texas, it can provide critical financial protection if you’re in a situation where you owe more on your vehicle than it’s worth.

Best Gap Insurance Companies In Texas

When shopping for Gap insurance in Texas, it’s important to choose a reputable provider that offers affordable rates and reliable coverage. Here are five top companies that provide Gap insurance in the state, each with its own strengths.

GEICO

GEICO is known for offering affordable Gap insurance as an add-on to their auto insurance policies. With competitive rates and a reputation for excellent customer service, GEICO is a solid choice for drivers looking to bundle Gap insurance with their existing coverage. Policies can be managed easily through their user-friendly app and website.

State Farm

State Farm is the largest auto insurer in the U.S. and offers Gap insurance as part of its extensive product lineup. State Farm is ideal for those who want comprehensive coverage options and the ability to work with a local agent. The company also provides helpful resources for understanding your policy and insurance needs.

Allstate

Allstate is another well-established insurance provider that offers Gap insurance. Known for its “Drivewise” program and various discounts, Allstate is a good choice for drivers who want personalized service. Allstate’s Gap coverage can be easily added to an auto insurance policy and offers broad protection, particularly for new or financed cars.

Progressive

Progressive is a popular choice for drivers looking for flexibility and customization in their auto insurance policies. Their Gap insurance, often called “loan/lease payoff,” covers up to 25% of the car’s value beyond what your standard auto policy pays. Progressive is known for competitive rates and their Snapshot program, which could further reduce your insurance costs.

USAA

USAA is a top-rated insurance provider for military members and their families. If you’re eligible for USAA’s services, their Gap insurance is among the best in terms of affordability and coverage. Known for outstanding customer service and tailored policies, USAA also offers a wide range of financial services beyond just auto insurance.

Each of these companies offers reliable Gap insurance, but the right one for you will depend on your individual needs, such as whether you want to bundle it with existing coverage, your eligibility for discounts, or whether you value working with an agent or managing your policy online.

List Of Authorized Gap Insurance Companies In Texas

The following is a list of some companies that are licensed to offer gap insurance in Texas:

• American Modern Home Insurance Co.
• American National Property and Casualty Co.
• American Security Insurance Co.
• Arch Insurance Co.
• Balboa Insurance Co.
• Continental Casualty Co.
• Courtesy Insurance Co.
• Financial American Property and Casualty Insurance Co.
• First Colonial Insurance Co.
• Great American Insurance Co.
• Great American Insurance Company of New York
• Ironshore Indemnity Inc.
• Landcar Casualty Co.
• Lyndon Property Insurance Co.
• Markel Insurance Co.
• MIC Property and Casualty Insurance Corp.
• Ohio Indemnity Co.
• Old Republic Insurance Co.
• Old United Casualty Co.
• Republic Lloyds
• Securian Casualty Co.
• Sentruity Casualty Co.
• Service Lloyds Insurance Co.
• Spinnaker Insurance Co.
• State National Insurance Co.
• Transamerica Casualty Insurance Co.
• United Financial Casualty Co.
• Universal Underwriters Insurance Co.
• Virginia Surety Co.
• Wesco Insurance Co.
• Work First Casualty Co.

Is It Worth It?

Gap insurance can be a smart financial safeguard, but whether it’s worth it depends on your specific situation. For many drivers, it offers peace of mind, ensuring they won’t be left with a hefty bill if their vehicle is totaled or stolen. However, for others, the added cost may not provide enough benefit to justify the expense.

Gap insurance makes sense for those who have recently financed or leased a new car, especially with little to no down payment. These vehicles tend to depreciate quickly, meaning that in the event of an accident, the actual cash value of the car might be significantly less than the outstanding loan amount.

Drivers with long loan terms, high-interest loans, or those driving vehicles that depreciate rapidly will also find Gap insurance helpful, as it covers the difference between what they owe and what their insurance company pays.

On the other hand, Gap insurance is probably unnecessary for drivers who own their vehicles outright or have paid off most of their loan. If you made a significant down payment or have a vehicle that depreciates slowly, the gap between your loan balance and the car’s value is likely minimal. Additionally, those with short loan terms or older vehicles typically won’t benefit from Gap insurance, as the risk of owing more than the car is worth is much lower.

How Much Do I Need?

When deciding how much Gap insurance you need, it’s important to ensure that it covers the difference between the remaining balance on your car loan and the amount your insurance company will pay if your vehicle is totaled or stolen. Standard auto insurance policies typically only pay out the actual cash value (ACV) of your car, which is its market value at the time of the loss.

However, cars depreciate quickly, especially new ones, meaning you could still owe thousands more on your loan than what the insurance company will reimburse you for the car’s value.

Gap insurance should cover the entire remaining balance on your loan after the insurance payout. For example, if your car is worth $20,000 at the time of the accident but you still owe $25,000 on your loan, Gap insurance would cover that $5,000 difference.

Without Gap insurance, you’d be responsible for paying that amount out of pocket. So, when purchasing Gap insurance, make sure the coverage is sufficient to bridge that gap between the loan balance and the actual cash value your insurance will pay.

Gap Insurance Laws In Texas

In Texas, Gap insurance is not legally required, but there are some key regulations and guidelines that relate to how it can be offered and what protections are in place for consumers. Here are the main laws and rules concerning Gap insurance in Texas:

• Optional Coverage: Gap insurance is completely optional in Texas. The state does not mandate that drivers carry Gap insurance, although some lenders or leasing companies may require it as part of their loan or lease agreements. This decision is based on the terms set by the lender, not by Texas law.
• Texas Finance Code (Section 348.208): Under the Texas Finance Code, if Gap insurance is included in a retail installment contract (typically when financing a car through a dealership), the dealership must disclose the terms and cost of the Gap insurance policy upfront. It must be presented as a separate, optional add-on, and buyers cannot be forced into purchasing it. The dealership is also required to provide a clear explanation of the coverage.
• Cancellation Rights: Texas law allows consumers to cancel Gap insurance within a certain period, typically 30 days from the date of purchase, and receive a full refund if the policy has not been used (i.e., no claims have been made). This “free look” period provides consumers with time to reconsider if they actually need the coverage.
• Refunds for Early Loan Payoff: If you pay off your loan early or trade in your vehicle, Texas law requires that you be refunded a prorated portion of any unused Gap insurance premiums. For example, if you took out Gap insurance for the full term of a five-year loan but paid off the loan after three years, you’re entitled to a refund for the remaining two years of coverage.
• Texas Administrative Code (Title 7, Part 5, Chapter 89): This section of the Texas Administrative Code governs how financial institutions and creditors disclose and handle credit insurance, which includes Gap coverage sold through lenders or dealerships. It ensures that consumers are provided clear information about the cost and scope of any coverage they purchase in connection with their vehicle financing.

Overall, while Gap insurance isn’t legally required in Texas, state laws ensure that consumers are protected from misleading practices and have the right to cancel policies or receive refunds if their coverage is no longer needed.

Read More: Comprehensive guide to car insurance in Texas