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Gap Insurance in Texas

Gap insurance in Texas is also known as guaranteed auto protection. The coverage helps an insured, in case of a total loss or theft, by covering the gap between the car’s actual cash value paid by the insurer after a covered claim and what is owed to a lender or lessor.

Gap insurance is an optional auto insurance coverage that fills in the gap between what you are paid and what you owe, which may be substantial. It may be the right coverage for people with long loan or lease terms. So, in addition to liability insurance, collision, and comprehensive insurance, purchasing gap insurance is a good idea if your car is financed and you owe more than the market value of your vehicle.

As this is an optional coverage, speak to a state-licensed insurance agent to understand better why the coverage may be important in your situation.

Nonetheless, you should carry out your research by asking the following questions:

What is Considered Gap Insurance?

Gap insurance is an optional auto insurance coverage that provides coverage between your actual cash value and the balance of the lease or loan you still owe. If your car involved in an accident is totaled or stolen, gap insurance pays for the deficit between the ACV paid and the money you still owe on the car.

If your car is being financed with a loan or leased, this coverage may be a good option for you, mainly if you are still owing a lot on the car. So if your car is worth $20,000 when new and you are still owing the lender $15,000. If the vehicle is stolen or totaled, the ACV at the time of the claim is $10,000, and you have a deductible of $500; your insurer will pay you $9,500 minus the deductible. However, you are still owing the lender $5,000, and this is where your gap insurance coverage helps you pay the remaining $5,000 on loan instead of paying out of your pockets.

Generally, vehicles lose value quickly, like luxury sedans and some sport utility vehicles. If you have one of these vehicles, your loan or lease contract may require you to get gap insurance in addition to collision and comprehensive insurance. However, this coverage can only be purchased if you are the original borrower or leaseholder.

What is the Purpose of Gap Insurance?

The primary purpose of gap insurance is to pay for the difference left between the actual cash value of your car and what you still owe on your car loan or lease. Typically, when you get into an accident or your car is damaged by something other than a collision, your claim payout will be equal to the value of your vehicle minus depreciation. If your car is still under a loan or lease, you will still need to pay the loan you owe regardless of the depreciation of the car’s value. This is where gap insurance serves its purpose by supplementing the claim payout from a collision or comprehensive by helping you pay back what you owe to the lender.

What is Gap Insurance for?

Gap insurance is primarily for total loss accidents, where the vehicle is deemed as irreparable.

When the car is considered a total loss - the loan on the vehicle must be repaid, in order for the lender to release the title, so the insurer can get rid of the damaged car through its channels.

The comprehensive auto insurance pays out the claim for total loss according to the actual value of the vehicle at the time of the loss. If the balance of the loan on the vehicle is for a higher amount than the value of the vehicle - gap insurance steps in to cover the difference. This way you are not stuck without a car and still owing money to the bank for it.

What are the Types of Gap Insurance?

There are many types of gap insurance plans. The main types are:

  1. Return to Invoice Gap Insurance: In the event that you experience a total loss on your car, this type of gap insurance will compensate you for the difference between your auto insurance company’s maximum pay-out amount and the exact price you paid for your car when you acquired it.

  2. Return to Value Gap Insurance: This type of gap insurance will compensate you for the difference between your insurance company’s maximum pay-out and the value of your car when it is new (even though your car was used when you purchased it). This sort of gap insurance is typically more expensive than others since it may result in a larger payout.

  3. Vehicle Replacement Gap Insurance: This type of gap insurance covers you for the difference between what your car insurance company will pay for your vehicle and the cost of buying a new version, with the same model, make, and specifications.

  4. Vehicle Finance Gap Insurance: If you file a claim on your car insurance for a total loss, market value gap insurance will pay you a portion of the car’s market value to cover the gap and maybe more.

Do you Need Gap Insurance in Texas?

Whether you need gap insurance depends on your insurance needs. Gap insurance is an optional coverage used majorly by individuals financing their car with a loan or through a lease. If you buy your vehicle outrightly, you do not need gap insurance. However, before you purchase this insurance coverage, you should speak to a state-licensed insurance agent for more information.

Why Do you Need Gap Insurance?

Comprehensive and collision car insurance policies will only pay the actual cash value of your car after a covered accident. You may need gap insurance to pay what you are still owing if your vehicle is being financed. If you fall into the following categories, you may need gap insurance, and you should consider purchasing gap insurance:

  • You made no payment, or you have a small down payment on your car. Since car depreciation may be up to 20% annually, you will end up owing more than the vehicle’s value by at least 15% of their value in the first year.

  • Your loan term is long because you spread the payments over a long period, which means you can't offset your loan payment within a short period.

  • Your vehicle’s model and make have a track record of depreciating quickly.

  • You intend to drive your car a lot. The faster you add the miles on your vehicle, the quicker the level of depreciation. According to the U.S. Department of Transportation’s Federal Highway Administration, in 2018, an average American motorist drives up to 13,476 miles annually.

  • Your car is a lease.

  • You own a luxury or high-value vehicle.

  • If during the purchase, you trade in a car that was already upside-down on its financing, the gap gets transferred to the newly purchased vehicle (if the new lender allows).

Your gap insurance is supposed to be used alongside your collision or comprehensive insurance coverage. So when there is a covered accident, and you have been paid the ACV, but you still owe more on your loan, you can think of gap insurance.

How Much Gap Insurance Do you Need?

To determine how much gap insurance coverage you need depends on the loan you have to pay. If you have a long-term payment plan for your loan, you probably need to get enough gap insurance coverage to make up for the car’s depreciated value. However, if your payment term is short and you intend to pay back your loan as early as possible, usually you do not need expensive coverage.

When shopping for gap coverage - get multiple quotes from different gap insurance providers.

Is Gap Insurance Required by Law in Texas?

While gap insurance is not required by law in Texas, it may be required by the lender, prior to agreeing to finance your new vehicle.

How Does Gap Insurance Work?

Gap insurance works to cover the difference between what you still owe on your car loan and the actual cash value paid on your vehicle when it is stolen or totaled. It is important to note that you must have comprehensive insurance coverage for your gap insurance coverage to cover your stolen vehicle. Also, for your gap insurance to cover your totaled car, you must have collision insurance coverage. This is because gap insurance only works to supplement these other coverages when the actual cash value cannot pay off the entire loan on your covered car. It won’t work only with your auto liability because the insurer does not pay you for repairs or car replacement under an auto liability policy.

For gap insurance coverage to be invoked, the loss or damage to your vehicle must be under its coverage limit. What does gap insurance cover and what does it exclude?

What Does Gap Insurance Cover?

Gap insurance coverage can only protect an insured if they are the original loan holder or leaseholder if the car was leased.

What is Gap Insurance Good for?

Gap insurance is good for protecting people who still have a lot to pay on their loans. Gap insurance helps you cover the difference between what is left on your loan after a covered incident.

For example: If you still owe a balance of $27,000 on a $30,000 loan for your car, and your vehicle is totaled or stolen in a covered event, your insurer, after valuation, may pay you $19,000 (the actual cash value of $20,000 minus a deductible of $1,000). In this case you still owe $8,000, and if you don't have gap insurance coverage, you would have to pay the $8,000 yourself.

What Does Gap Insurance Typically Include?

Gap insurance provides coverage for:

  • An insured's car if it is stolen

  • An insured vehicle if it is totaled

Who is Covered by Gap Insurance?

Gap insurance covers:

  • The insured individual who finances a vehicle - by being able to repay the debt owed, and

  • The shareholders and other stakeholders behind the financial institution that made the loan - by guaranteeing that there is no loss of loaned out capital in case of an upside-down financial exposure.

What Types of Items Does Gap Insurance Cover?

Gap insurance will cover your car after any event that renders the vehicle damaged beyond repairs (a total loss).

You total a car, which you purchased for $30,000. It is still under a loan, and you still owe your lender $28,000. While processing your comprehensive or collision claim, the insurer considers the current condition of your car and assigns it a total loss actual value of just $24,000. After taking out the deductible of $500, the insurer is ready to pay $23,500 (minus other small possible fees) to whoever holds the title of the vehicle. Since the car is still financed, the lender is listed on the title as a financially interested party. Until the loan is paid off - the title cannot be cleared and the insurer cannot take possession of the car, to process it further through its channels.

This situation creates a debt gap of $4,000 ($28,000 - $23,5000 = $4,500), which Gap insurance bridges.

So after your primary auto insurance coverage pays out up to its limits, whatever is left as your debt on the loan, that was not covered by the total loss payout - gets taken care of by the gap insurance coverage.

Does Gap Insurance Cover Theft?

Yes, gap insurance covers theft.

After the financed car is stolen and not found, or found but considered a total loss, comprehensive insurance pays to replace the lost vehicle at the actual cash value (minus depreciation), while gap insurance covers the difference between what the insurance paid and the balance of the loan.

Speak to a state-licensed property & casualty (P&C) insurance agent, if you need further information regarding gap insurance and other insurance coverages.

What is not Covered by Gap Insurance?

Gap insurance coverage only covers the original loan or leaseholder, not other people or their property. Also, note that the gap insurance does not cover the items in your car, and it can only go into effect if your vehicle experiences a total loss. So, what does gap insurance exclude:

What Does Gap Insurance Typically Exclude?

Gap insurance plays an important role in protecting an original loan borrower and their financial institution. However, it only protects them in certain situations. Gap insurance coverage excludes the following situations:

  • Gap insurance cannot cover you if your car is not totaled but needs only repairs. So if a collision or an accident other than collision damages your financed car, your gap insurance cannot help, even though you will be paid your ACV. This is because your vehicle is not damaged beyond repairs.

  • Gap insurance cannot cover your deductible payment. When you are paid the ACV of your car at the claim payout, the insurer pays you the ACV minus deductible. That is, your ACV is $20,000, and your deductible is $1,000; the insurer would have paid you $19,000. Then after this, can the gap insurance coverage come in to pay for the remaining loan amount.

  • Gap insurance does not cover bodily injury, and it does not cover anything relating to your medical bills, lost wages, funeral costs, or any other accident-related. So if you got injured as a result of a covered accident, your gap insurance could not cover it.

  • Gap insurance cannot help you pay when you are falling behind on payments due to financial hardships. Just because you can not afford to pay your car loan, does not mean your gap insurance will cover it.

  • Gap insurance cannot also pay for car rentals after your covered car has been stolen or totaled. Any cost incurred at that time should usually be covered by rental reimbursement coverage if you have it.

  • Gap insurance cannot help you with your car’s down payment.

What is an Example of Gap Insurance?

An example of gap insurance is when you buy a new car with a loan for $25,000 and have only paid off $5,000 of the principal. It means you still have $20,000 on your loan yet to be paid off. If this financed car is totaled or stolen, your comprehensive or collision auto coverage insurer pays you the car’s market value at the time of the accident, which may be $18,000 (based on the condition of the car and its mileage at the time of the total loss) .

Then the insurer subtracts the $1,000 deductible from the value, resulting in the net payout of $17,000. However, you still owe a balance of $20,000 on the loan. This is when your gap insurance coverage steps in and covers the difference (in this case $3,000), to clear your debt on the vehicle that can no longer be driven.

Gap insurance example:

New car price $25,000
Loan balance after one year (4% APR/5-year loan) $20,000
Actual cash value (ACV) after one year $18,000
Insurance payment without gap coverage $17,000
Deficit $3,000
Gap insurance payment $3,000

If you don't have gap insurance, you will have to pay the $3,000 deficit. However, if you have gap insurance, your $2,000 will be taken care of by the insurer. Note that the remaining $3,000 loan gets paid directly to the car lender, after which the lender signs off on the title, stating that the lien has been satisfied and that the insurer may dispose of the vehicle as they see fit (usually through salvage yards).

What is the Most Common Use of Gap Insurance?

It is a fact that one of the fastest depreciating assets is a vehicle; it can drop by a third as soon as you drive it off from the dealership. The value can drop by an average of 60% over the next three years. As your car value drops, the amount your auto insurance company will pay you at the time of a claim payout will also be dropping. This means the amount you will get as claimed will be lesser than how much you still have to pay the lender financing your car. So how does gap insurance work? To answer this, we will look at the What, How, and Why?


Gap insurance is also known as guaranteed asset protection insurance. This is the adoption of add-on coverage used by individuals who are financing their vehicles. It helps you cover the gap between the actual cash value of the car and what you are still owing on the loan when a covered accident occurs. In such an event, the covered vehicle must have been totaled or stolen.


Gap insurance can only be applicable if you are financing your car. So this is how gap insurance works when your car is totaled, but you still owe $15,000 on the car loan at the time of the covered accident. However, your ACV is just $11,000 minus your deductible of $1,000, and your gap insurance will help cover the $3000 difference.


You may need gap insurance to help you pay off what is left of a car loan after the insurer has already covered the collision or theft. Why do you need gap insurance? You need it if it is difficult for you to pay out of your own pockets.

You can direct your question to a state-licensed insurance agent who can explain further, how you can use gap insurance and why you may need the coverage.

What is the Difference Between Gap Insurance and:

What is the Difference Between GAP Insurance and CRA (Car Replacement Assistance)?

While both Gap insurance and Car Replacement Assistance (CRA) coverage provide monetary protection in excess of the actual cash value (ACV), paid by the insurer after a vehicle is determined a “total loss” - there is a difference:

  • CRA is a benefit that pays its benefit to the insured.

  • Gap Insurance pays its benefit to the organization that finances the vehicle for the insured.

Car replacement assistance (CRA) is a supplemental coverage that can be added to a comprehensive auto insurance policy, which pays an additional percentage (usually 10% - 20%) of actual cash value (ACV), on top of the full ACV. CRA allows the insured to get 10-20% of extra coverage, which can come in handy while shopping for a replacement vehicle. For example, a claim with an ACV of $10,000 pays: $11,000 at 10% CRA, and $12,000 at 20% CRA. The other way of looking at CRA coverage is as a 110% ACV payout or a 120% ACV payout. The deductible comes out prior to the distribution of the benefit.

Meanwhile, gap insurance is a supplemental insurance that is usually required by the lender of a car loan, to guarantee that the full amount of the loan gets repaid, in case if the financed vehicle is totaled and the amount paid by insurance is not enough to cover the debt.

What is the Difference Between Gap Insurance and Comprehensive Insurance?

The main difference between gap insurance and comprehensive insurance is how the coverage works. First, comprehensive insurance has to be in force for gap insurance coverage to kick in, and the car must have been stolen for the insurer to close the gap left between the ACV and what is left on loan.

Another difference is that gap insurance pays off what is left on the car loan after a covered accident. In contrast, comprehensive insurance only pays the insured the actual cash value of the car at the time of the incident.

The direct comparison between gap insurance and comprehensive insurance is that both are optional add-on coverage.

Who Can Get Gap Insurance?

Anyone who has a loan on a vehicle, where there is a chance that the actual cash value of the vehicle is lower than the borrowed value - can get gap insurance Texas insurance.

Also, the individual must be of legal age to drive and own the car personally, and possess the state-required auto liability insurance coverage to be eligible to buy additional insurance coverages like a gap. .

Who Qualifies for Gap Insurance?

Only individuals who buy their car with a loan or lease their vehicle qualify for gap insurance in Texas. Even though it is optional add-on coverage, not all drivers qualify for gap insurance, and not all qualified drivers should get it. Some insurance companies require you to have the following:

  • The vehicle is to be brand new, and you being the original owner of the car

  • If the vehicle is not new, then the car should not be older than two or three model years.

Before you decide to purchase gap insurance, check with a state-licensed insurance agent to see if your present car situation qualifies you to buy gap insurance.

Who Needs Gap Insurance?

​​If your car is being financed and the balance lags behind the actual cash value of the car, then you may need gap insurance. However, it still depends on how often you drive and how much loan balance you have left on the car. If you are close to paying the loan off, you should not need it.

Who Should Get Gap Insurance?

If you did not make a large down payment during the purchase of a new vehicle, and the amount you owe now exceeds the car’s cash value, then you should get gap insurance.

You should get Gap insurance if…
  • You have made a down payment of less than 20% on your car during purchase.

  • Your remaining loan term is 60 months or longer

  • You are leasing a vehicle.

A state-licensed insurance agent can help you if you need to get gap insurance. The agent can also clarify any issues or questions you may have about gap insurance.

What ae te Benefits of Gap Insurance?

Gap insurance protects you when your financed car is totaled or stolen by closing the gap between the ACV and the remaining balance owed to the financing organization. Although not having gap insurance in Texas does not attract any penalty, you should consider the pros and cons of having gap insurance to understand the benefits and downsides. ​​

Why is Gap Insurance Good?

  • Gap insurance is good because it protects the insured in case of a total loss for a financed vehicle. You are less burdened with coming up with ways how you will be paying back the remaining money owed on your car loan, after the insurer has paid the claim according to the ACV - and the payout was short of the remaining balance due

  • You can think about replacing your vehicle quickly since you don't have to pay off the loan anymore.

  • It is inexpensive, especially when compared to other insurance coverage costs.

Why is Gap Insurance Bad?

  • Gap insurance is bad not because of its coverage, but because it is possible to keep paying for it, without realizing that the need for it has passed. Once you have paid off a significant part of the loan, you should stop the unnecessary coverage. (check with your financing institution and your insurance agent for details, recommendations, and advice)

Is Gap Insurance Worth it?

Gap insurance is only available if you are financing or leasing your car. Gap insurance is worth it,depending on how much you still owe on your car compared to the car’s cash value. To tell if buying gap insurance is worth it, you need to answer what happens if you don't have the gap insurance? And what is the importance of the coverage?

What Happens if you Don’t Have Gap Insurance?

If you finance your car with a loan or under a lease, you should consider getting gap insurance. This is because if you still owe more than 60% balance on the car loan, and your car is totaled, gap insurance will provide coverage. However, if you don't have gap insurance when your vehicle is stolen or totaled, you still have to pay the lender whatever is left after the comprehensive or collision auto has paid the actual cash value (ACV).

Example:, An individual has a car financed with a car loan, with a balance of $45,000. The vehicle is protected with a comprehensive auto insurance policy with a $1,000 deductible. This person did not purchase gap protection.

After a total loss event, the insurer will pay the insured the ACV of that car. So, if the ACV was determined as $42,000, minus the deductible of $1,000, the payment from the comprehensive auto insurer to the financing bank will be $41,000. Now there is a gap of $4,000 between what the regular car insurance has paid and what you owe to the bank.

Without gap insurance in place and the need to get a new vehicle, you may need to roll this existing debt into the next car purchase. This results in an upside down loan from day one of car ownership. Expect for the lender this time to demand gap coverage as a condition of issuing the loan.

In the end, if you do not want gap insurance, ensure you have other coverages that will minimize how much you will pay if your car is totaled or stolen, such as the Car Replacement Assistance (CRA) coverage. Speak to a state-licensed insurance agent to guide you through this process.

Why is Gap Insurance Important?

Gap insurance is important because it helps you pay your debt, when the actual cash value of your financed vehicle does not fully cover the full loan repayment.

What Happens When your Gap Insurance Lapses?

When your gap insurance lapses, your coverage stops. This means in the event your car is totaled or stolen after the insurer pays the actual cash value (ACV) minus deductible, you will have to pay what you still owe on the loan - out-of-pocket, or roll this debt into the next financed vehicle.

Gap insurance lapses when you default on the premium payment and fail to pay within the grace period; the insurer, in turn, cancels the policy. When your policy lapses, it may affect your credit report and increase your rate if you buy another insurance policy, because the lapse of coverage stays on your insurance history. In the end, you should pay premiums and avoid a lapse in coverage to ensure continuous protection until you are able to cancel the policy.

If you have questions about gap insurance coverage in Texas, speak to a state-licensed insurance agent to help you with the research and/or purchase process.