Gap Insurance: Texas Car Protection

Gap insurance, also known as a debt cancellation agreement or gap waiver, is an optional auto insurance coverage that covers the difference between what you owe on your car and what it's worth. This type of insurance is particularly relevant in Texas, where a new car's value can depreciate disproportionately over the first few years, leaving vehicle owners owing more on their lease or loan than the vehicle is worth. Gap insurance can help cover the remaining balance on a vehicle loan or lease after a total loss, such as in the case of theft or damage. While not required by Texas state law, gap insurance can provide valuable financial protection for new vehicle owners.

When do you need gap insurance?

Gap insurance is designed for very specific situations. It is particularly useful if you have a car loan or lease and your vehicle is stolen and not recovered, or totaled in an accident or other vehicle mishap, such as a fire. It can save you from having to incur out-of-pocket costs in the event that you owe more on your car than the vehicle is worth.

Gap insurance is designed to cover the difference between what your car is currently worth and what you still owe on it. For example, if your car is totaled, and you owe $25,000 on your loan, but the car’s market value at the time of the accident is only $18,000, gap insurance may cover the $7,000 gap, saving you from having to pay this amount out of pocket if your primary car insurance doesn’t cover the full loan amount.

Gap insurance is generally only available for newer vehicles. Your car needs to be brand new or no more than a year old to qualify. It is also important to differentiate gap insurance from new car replacement coverage. While both types of insurance are for newer cars, new car replacement coverage is designed to cover the cost of a new model of your totaled car. Gap insurance, on the other hand, helps you clear any negative loan balance in the event you total your vehicle.

Gap insurance is not used for covering repair costs, no matter how expensive they are. It is there to help you financially when your car is beyond repair, and the amount you owe on it exceeds its depreciated value. This specific coverage is a crucial aspect to consider, especially if you have a new car with a substantial loan amount.

You should consider getting gap insurance if you are financing or leasing a new car and are concerned about the potential financial gap if your car is totaled or stolen and you owe more on the loan than the car’s depreciated value. It is also worth considering if you would struggle to pay off your auto loan in the event of a total loss during your first couple of years of owning a new vehicle.

How does gap insurance work?

Gap insurance, or guaranteed auto protection insurance, is an optional product that covers the difference between the amount you owe on your auto loan and the amount your insurance company pays out if your car is stolen or deemed a total loss. This type of insurance is intended for situations where the loan balance is higher than the value of the vehicle.

For example, if you owe $25,000 on your loan and your car is only worth $20,000, gap insurance will cover the $5,000 difference, minus your deductible. This type of insurance is especially useful if you have a smaller down payment, a longer financing term, or a higher depreciation rate on your vehicle.

In Texas, gap insurance is known as a debt cancellation agreement or gap waiver. While it is not required by law, it can be valuable for motorists with new vehicles if their vehicle is stolen or totaled. Texas law stipulates that the maximum cost of gap insurance is 5% of the loan's value.

You can purchase gap insurance through a dealership or insurance provider, and it is usually added to your loan amount. However, it is important to compare prices and coverage before purchasing, as some insurance companies do not offer gap insurance. Additionally, you have the right to cancel this optional product at any time and may be entitled to a refund if you sell, refinance, or prepay your auto loan.

What does gap insurance cost?

The cost of gap insurance varies depending on where you buy it. Dealerships and banks charge a lump sum of between $400 and $700 for gap insurance, making them the most expensive choice. Since the sum is usually added to your auto loan, you will also have to pay interest on it.

The best deals on gap insurance are generally available from car insurance companies, which charge as little as $3 per month for coverage. Instead of charging a lump sum, insurers include the cost in your regular premium payments. On average, insurance companies charge $20 to $40 per year for gap insurance when bundled with an existing insurance policy. This typically only increases your comprehensive and collision insurance cost by about five to six percent. If you want to buy a standalone gap insurance policy, you can expect to pay between $200 and $300.

According to Greater Texas Federal Credit Union, gap insurance can be an inexpensive addition to your monthly payment. Costs for gap insurance coverage can vary from $500 to more than $1000. The maximum cost of gap insurance under Texas law is 5% of the loan's value. The cost of a gap policy for a $40,000 vehicle could be upward of $2000. After purchasing coverage, you may cancel within 30 days to receive a refund.

Exclusions and reductions

As with any insurance policy, it is important to be aware of any exclusions and reductions that may apply. When it comes to gap insurance in Texas, there are a number of standard exclusions that may reduce your payout in the event of a claim. Here are some key points to keep in mind:

• Late payments: If you have missed any payments on your loan or lease, this may reduce your payout.
• Unpaid finance charges and warranty costs: Any outstanding finance charges or warranty costs that you owe may be excluded from your gap insurance coverage.
• Deductible: If your insurance policy includes a deductible, you may need to pay this amount before your gap insurance coverage kicks in.
• Previous accident damage: Gap insurance typically does not cover damage from previous accidents. If your vehicle has sustained damage in a previous accident, this may reduce your payout.
• Balloon payments: Balloon payments, or lump-sum payments that are larger than your regular payments, may not be covered by gap insurance.
• Appraisal deadlines: If you are not satisfied with the payout amount from your gap insurance claim, you may be able to request an appraisal. However, there may be deadlines for demanding an appraisal, so be sure to check your policy for any relevant timelines.

It is important to carefully review your gap insurance policy to understand any exclusions or reductions that may apply. These exclusions and reductions can vary between insurance providers, so be sure to ask about them when shopping for gap insurance. Additionally, keep in mind that gap insurance is not required by law in Texas, but it can be a valuable form of financial protection for vehicle owners who are concerned about the potential financial gap between their vehicle's value and the amount they owe on their loan or lease.

Where to buy gap insurance in Texas

In Texas, gap insurance can be purchased either from an insurance company or through a dealership as a standalone policy. While not all insurers are authorised to offer gap insurance in Texas, it is recommended that you first get quotes from your auto insurance company. Coverage directly from insurers is often less expensive, at several dollars per month, especially if the coverage is added to an existing policy.

WalletHub recommends getting a quote from your existing insurance provider first. Buying insurance directly from an insurer is usually cheaper, at approximately $7 per month on average as add-on coverage.

Some insurance providers in Texas offering gap insurance include:

• Associated Credit Union of Texas
• Allstate
• Greater Texas Credit Union
• USAA
• Texas DPS Credit Union
• American Modern Home Insurance Co.
• American National Property and Casualty Co.
• American Security 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 Company of New York
• Ironshore Indemnity Inc.
• Landcar Casualty Co.
• Lyndon Property Insurance Co.
• Markel Insurance Co.
• MIC Property and Casualty Insurance Corp.
• Old Republic Insurance Co.
• Old United Casualty Co.
• 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.
• Work First Casualty Co.

If you are considering buying standalone gap insurance through an auto dealership in Texas, it is recommended that you compare rates against those from auto insurers. The cost of gap insurance from a dealership may range from around $500 to over $1,000, meaning you may spend significantly more, depending on the dealership's rates. Since the maximum amount a dealership can charge for gap insurance is 5% of the loan value, the cost of coverage for a $30,000 car can be as high as $1,500.

Frequently asked questions