Understanding Car Leasing Insurance Options

Leasing a car can be a low-commitment way to drive a new car with a potentially lower monthly payment than if you were to purchase it outright. However, just because you don’t own the vehicle, that doesn’t mean you get to skip out on paying for an insurance policy. In fact, you may find that insurance requirements are stricter regarding minimum coverage and deductibles. Your lease agreement likely requires you to maintain the car, repair any major damage—and pay off the lease, even if the car is totaled in an accident.

Here’s a quick breakdown of the ins and outs of insurance requirements and options for leased cars.

What Insurance Do You Need for a Leased Car?

The national Consumer Leasing Act requires “a brief description of insurance provided or paid for by the lessor or required of the lessee, including the types and amounts of the coverages and costs.” Dealers will tell you what kinds of insurance you must carry to protect their property, which in this case is the car.

Requirements vary by state and lessor, but you’ll typically need to carry:

• Bodily liability insurance: Covers bodily injury or death you cause to others.
• Physical damage liability insurance: Covers damage you cause to others’ property.
• Collision insurance: Covers physical damage to the car in an accident.
• Comprehensive insurance: Covers physical damage to the vehicle in a non-collision incident, such as a fire, theft, or natural disaster.

For your leased vehicle, you may be asked to carry more auto insurance coverage than your state minimum. Here are some sample requirements from different auto financing institutions for leased vehicles:

However, these are just examples. State law influences your final insurance requirements, so make sure to read your lease agreement carefully.

What Optional Coverage Could You Be Offered for a Leased Car?

When you buy, finance, or lease a car, the dealership may offer you optional packages or individual coverages, such as an extended service contract or roadside assistance. Coverages that specifically pertain to leased vehicles include:

• Guaranteed auto protection: Covers the gap between your car’s actual value and what you owe, and is required by some leasing companies.
• Excess wear and use protection: Covers wear beyond what’s considered normal to avoid charges at the end of the lease, but may or may not cover excess mileage.
• Credit life or disability insurance: Covers your insurance payments if you die or become disabled.

These coverages and add-ons can increase your lease and interest costs. In some cases, you can decline the dealer’s coverage and shop for your own coverage. In other cases, policies may duplicate coverage you already have. For example, an extended service contract may duplicate a portion of your new car warranty, or credit life or disability insurance may be unnecessary if you have life insurance.

Leased Car Insurance Costs

It typically costs more to get insurance on a leased car than one you own because:

• You’ll be required to purchase a specific, usually higher, amount of insurance.
• Choosing a higher deductible typically lowers your annual policy costs, but if your lease specifies a maximum deductible of $500 or $1,000, you might not have much of a choice.
• Some insurers may consider a leased car to be a higher risk than a purchased car.

Insurance for a leased car may cost about the same amount as for a financed car, since the bank or auto financing company will also likely require collision and comprehensive insurance. However, it may not have the same requirements regarding deductibles or minimum liability.

However, your final costs will be based on various factors, such as the car type, your state, and your driving record.

Do You Need Gap Insurance on a Leased Vehicle?

Gap insurance is also known as guaranteed auto protection insurance and it’s intended to help make up the difference between the amount you owe on the leased car versus the amount your insurance company might pay if the vehicle is totaled.

New cars quickly lose value, so what the leasing agreement says you owe for a lost or damaged vehicle could be more than what your insurance company is willing to pay. Some insurance policies have exclusions, such as previous accident damage or overdue payments, that could limit how much you’re paid. The difference could leave you on the hook for thousands of dollars.

The concept can be confusing due to the different ways dealerships and insurance companies cover the gap, but here are some basic approaches:

Here’s more on the two main types of gap insurance you may be offered or can shop around for.

Leasing Company Gap Coverage and Waivers

The gap coverage or waiver may only be available when you initially get your leased car, so you can’t add it later. Some gap waivers may help pay your deductible, while others offer dealer credit toward a replacement vehicle. The coverage limit could be as high as 150% of your car’s new or retail value, or it could have limits such as waiving a loss of up to $75,000.

However, read the fine print. You may still be responsible for a remaining balance in some cases, and there may be limits on vehicle value or waived losses. If your gap insurance is bundled into your lease, you may wind up paying interest on the insurance costs.

To avoid this, you may be able to decline gap insurance from the lessor and buy your own coverage from an insurance company.

Insurance Company Gap Coverage

Gap insurance from a traditional insurer may be called “loan/lease gap insurance” or “loan/lease payoff.”  Insurers will likely require you to carry comprehensive and collision coverages to qualify, but your lessor probably does, too.

The insurance company’s gap insurance coverage probably won’t pay your deductible. In addition, some insurers state that the loan/lease payoff coverage will only pay a portion of your car’s actual cash value. For example, Progressive’s gap insurance only pays up to 25% of the vehicle’s actual cash value.

How Much Does Lease Gap Insurance Cost?

The cost of loan/lease payoff insurance varies from insurer to insurer, but American Family says it costs only “a few dollars.”

Consumer advocacy group United Policyholders claims that gap coverage from a dealership could be a one-time cost of $500 to $700, often rolled into your lease with interest. The group suggests that this coverage is generally cheaper when purchased from an insurance company.

How to Get Car Insurance for Your Leased Vehicle

If you haven’t yet signed your lease agreement, ask about what type of coverage is required versus optional, and what you can buy from the dealership versus on your own. If possible, shop around to compare minimum requirements for a leased vehicle and compare pricing for gap insurance.

Your lease agreement will likely require you to list the leasing financial institution as the loss payee and additional insured.