Guaranteed Asset Protection (GAP) insurance, also known as debt cancellation insurance or auto loan and lease coverage, is a type of insurance worth considering if you have a car loan or lease. In Texas, gap insurance can be beneficial if your vehicle is stolen and not recovered, or if it’s totaled in an accident or other incidents like a fire. It helps you avoid out-of-pocket expenses if you owe more on your car than its current value. This guide aims to answer your questions about what gap insurance is in Texas and how it operates.

Understanding gap insurance in Texas is essential for vehicle owners. This optional coverage provides financial protection in specific situations, particularly beneficial for those who have recently leased or purchased a new vehicle and hold the original loan or lease. It is especially appealing if the financed amount is close to the car’s value.

In Texas, gap insurance covers the difference between your car’s current worth and the outstanding loan balance. For instance, if your car is totaled and you owe $25,000 on your loan, but its market value at the time of the accident is only $18,000, there’s a $7,000 gap. Gap insurance can cover this $7,000, helping you avoid out-of-pocket expenses if your primary car insurance doesn’t cover the entire loan amount.

Understanding how gap insurance operates in Texas involves considering several important factors. Here’s a breakdown to clarify its functions:

  • Gap insurance is typically available for newer vehicles.
  • Many people mistakenly think gap insurance can be obtained for any financed vehicle, but generally, your car must be brand new or no more than a year old to qualify.
  • It’s crucial to distinguish gap insurance from new car replacement coverage.
  • Although both types of insurance typically apply to newer vehicles, new car replacement coverage specifically helps pay for a new model of your totaled car.

In summary, if your new car is totaled and you owe more on your loan than its current value, gap insurance covers the financial shortfall. Conversely, new car replacement insurance helps pay for a new version of your totaled vehicle. Essentially, gap insurance assists in settling any negative loan balance if your car is declared a total loss.

Gap insurance is tailored for specific situations, primarily activated when your car is deemed a total loss. This can occur due to severe accidents, theft (if the car isn’t recovered), or other damaging events like a fire. Importantly, gap insurance does not cover repair costs, regardless of how high they are.

For example, if a tree falls on your parked car and causes extensive damage, gap insurance would apply only if the insurance adjuster determines your car is a total loss and you owe more on your loan than its current market value. If the damage repair costs are $7,000 but the car can be repaired, those expenses would typically be covered by your comprehensive insurance, not gap insurance.

In summary, gap insurance provides financial assistance when your car is irreparable and the loan balance exceeds its depreciated value. This coverage is especially important for new cars with significant loan amounts.

Gap insurance in Texas is optional but shares some characteristics with other standard car insurance types. For example, liability insurance is mandatory in most U.S. states and covers damages to the other party in an at-fault accident. Other coverage options, such as comprehensive and collision insurance, protect your vehicle itself. Here’s how gap insurance fits into this landscape:

Type of CoverageGap InsuranceComprehensiveCollision
What It CoversCovers the gap between your car’s depreciated actual cash value (ACV) and the remaining balance on your car loan, if the loan balance exceeds the ACV.Covers damages to your car not caused by accidents, including those from natural disasters (like floods and hail), theft, vandalism, or collisions with animals.Covers repair costs for your car after a collision, regardless of who is at fault. This includes incidents such as hit-and-runs and damage from road hazards.
AvailabilityOffered by various insurers, as well as car dealerships, banks, and credit unions.Available from most insurers as an optional add-on.A widely available option offered by nearly all insurance companies.

When considering gap insurance, begin by checking with your car dealership to see if they offer it. Typically, dealership gap insurance can be more expensive than options available through the broader insurance market or finance companies. Taking the time to research can lead you to a policy that not only costs less but also provides more comprehensive coverage, along with better service and efficient claims handling.

Under Texas law, it’s important to note that the cost of your gap insurance should not exceed five percent of your loan amount, which can help you assess the fairness of the pricing.

It’s also a good idea to compare offerings from your current car insurance provider as well as other insurance companies or financial institutions. While gap insurance isn’t mandatory in Texas, it’s often a wise choice for those financing a new or nearly new vehicle.

Here are some providers of gap insurance in Texas:

  • Associated Credit Union of Texas: You can add gap coverage to your existing auto loan or choose it during the loan application process. Refunds are available if the coverage is canceled within the first 60 days.
  • Allstate: As one of the largest insurers in the U.S., Allstate offers gap insurance to Texas customers. This coverage is typically recommended for those who financed less than 20 percent upfront, have auto loans of 60 months or longer, or are leasing their vehicles.
  • Greater Texas Credit Union: This credit union provides affordable gap insurance for its members, available for up to 18 months from the start of the auto loan.
  • USAA: Serving military members, veterans, and their families, USAA offers gap insurance as part of its range of budget-friendly insurance options. If you qualify, obtaining a quote from USAA could be advantageous.
  • Texas DPS Credit Union: Their Gap Plus option includes standard gap coverage along with deductible assistance for cases where the vehicle isn’t totaled. Additionally, they offer a $1,000 discount on your next loan with the credit union.