Insuring a leased vehicle
Car owners are likely already familiar with the process involved in insuring their vehicle: shop for the policy and insurance company that works best, agree to the terms and retrieve the insurance card. However, the process of purchasing insurance for a leased vehicle may require some additional steps.
Like other vehicles, leased vehicles also require insurance. Because the vehicle belongs to the company that leases it out, there will likely be additional insurance requirements on top of the state-mandated insurance guidelines for car owners. Knowing the ins and outs of the insurance-buying process for leased vehicles helps make the leasing process more efficient and less stressful.
Car insurance for a leased car
The process for insuring a leased car is similar to insuring a financed vehicle. The main difference between insuring a leased vehicle and insuring a vehicle you own is that you may be required to purchase additional coverage, depending on any stipulations outlined by the company that owns your vehicle. Leasing your vehicle does not usually directly impact premiums, but some providers may consider it in setting your rate. However, if this is the case, the premium impact is usually minimal.
Lease insurance requirements differ, depending on what’s specified in your lease agreement. However, there are a few standard coverage options that lessees can expect to pay for when insuring their leased vehicle.
Lease car insurance requirements
Because the leasing company owns the car, it’s necessary for an auto insurance policy to financially protect damage to the vehicle if it’s stolen or involved in an accident. Typically, leasing companies require collision coverage and comprehensive coverage. Collision coverage helps pay for repairs resulting from an accident, while comprehensive coverage provides coverage for repairs needed if the car is damaged via theft, vandalism or fallen objects.
Liability insurance for leased vehicles is often required to cover at least $100,000 per person for bodily injury caused to others, up to $300,000 per accident, and property damage of at least $50,000. Policyholders with a lease may also consider purchasing gap insurance, which pays the difference between a newer leased vehicle’s value at the time of a theft or accident and the amount you still owe.
It’s important to carefully review the lease terms, as some companies include gap insurance as part of the payments. If this coverage is not included, lessees may consider going with a carrier that offers gap insurance coverage through the auto policy.
Cost of insurance for a leased vehicle
Car insurance for leased cars can be more expensive than for owned or financed vehicles due to coverage requirements. For example, if you do not already have higher liability limits, such as a 100/300 bodily injury liability split, you will likely have to add it per the lease terms. If the coverage you carry does not meet at least the minimum lease requirements, the lender can purchase their own car insurance policy at your expense called force-placed insurance. Force-placed insurance is often significantly more expensive than a standard auto insurance policy that you might choose.
“Leasing a car comes with financial and lifestyle advantages that can make it a good option for many people,” says personal finance expert Laura Adams. “You make monthly lease payments for a set period and then return the vehicle at the end of the term. Your payments can be substantially lower than if you took out a loan to buy the same car.”
However, the cost of insurance for a leased vehicle can be higher due to the need for increased coverage to protect the financial interest of the company that owns the car.
“Lease car insurance can be higher because the leasing company is the car owner, and they want to reduce their financial risk if it’s stolen or involved in an accident,” explains Adams.
Lessees should scrutinize the terms of their agreement before leasing the vehicle. The perceived savings may not always be worth it if the added cost of insurance drives monthly payments for the vehicle up significantly.
However, purchasing a vehicle requires a long-term commitment, which may not be desirable for drivers that prefer to switch vehicles more frequently and take advantage of newer models. It’s a good idea to weigh all the options carefully to determine which is best for specific situations.
Frequently asked questions
What’s the difference between leasing and financing?
The main difference between leasing and financing a vehicle is that a leasing company owns the leased vehicle, whereas drivers of financed cars technically “own” the vehicle, but have purchased it with the help of a loan that needs to be repaid. Leasing is often compared to borrowing or renting, since drivers only keep the vehicle for a set period of time without ownership. Lessees may have less control over how robust their insurance coverage will be, as leasing companies have a stake in the vehicle’s welfare. Typically, they will require more coverage than necessary for an owned or financed vehicle.
Is it better to buy or lease a car?
This depends on your personal preference. Leasing a vehicle is usually less expensive than taking out a loan to purchase a car, and shorter lease agreements make it possible to change cars frequently, which can be a significant benefit for those who like to take advantage of the latest models. However, insurance for a leased vehicle could be higher than insurance for a financed vehicle, so the cost savings from monthly lease payment may be negated by the insurance premium.
Do I need to purchase gap insurance for a leased vehicle?
The need for gap coverage depends on the leasing company’s terms. Some companies include the cost of gap coverage in lease payments, so a separate gap insurance policy may not be needed. It’s important to review the terms of any lease agreement carefully to prevent paying for unnecessary coverage.
How much insurance is required for leased vehicles?
How much insurance is required for leased vehicles varies by the lender. Most lenders will require higher liability limits than your state mandates. You will also likely have to carry both comprehensive and collision coverage, which will each have a deductible amount you can select from your insurance carrier. For example, your lender may limit your comprehensive and collision deductible to $1,000 and want at least 100/300/50 liability limits.