According to the Edmunds 2020 Automotive Industry Report, car leasing volume grew from just over 1 million in 2009 to 4.3 million in 2019. Although you do not own the car in a lease, there are still vital insurance aspects to think about.
- When you have a leased car, you'll need to have collision and comprehensive insurance coverage.
- It might be good to have GAP coverage, which will protect your savings account if you're in an accident.
- Having the right insurance protects your leased car and makes sure you do not end up paying for damages out of your own pocket.
What Insurance Do You Need on a Leased Car?
Insurance on a leased car and a car you own are not that different. The main difference is that insurance for leased cars has to include the name of the lienholder (bank or leasing company, also called the lessor) as a named insured. Car owners do not need to name a third party. The lessor owns the car (until you pay off the loan or balance), so they can dictate the insurance coverage you need to have.
When you have a leased car, you won't be able to get by on only the minimum insurance your state laws say you can have. The lease contract will contain clauses that require you to have collision and comprehensive coverage on the car. This is because the lessor wants to make sure that it will be fully paid for any loss or damages to the car if something happens.
Getting comprehensive and collision coverage on a leased car also helps you protect your finances. It also makes sure your contractual obligations under the lease are met in the event of an accident or total loss.
Here are some key things to consider when you choose insurance for a leased car. Included are the type of coverage you need and some information about Guaranteed Asset Protection (GAP) Insurance. GAP insurance is extra coverage for the difference between the insurance value of the car and the amount you owe on the lease.
- Because you do not own the car outright and are only leasing it, the contract will not allow you to take minimum car insurance.
- GAP insurance is extra coverage.
- You still have to pay the deductible for your leased car insurance.
- GAP insurance does not cover any other losses that are a direct result of a mishap or theft.
- GAP insurance does not cover wear and tear or mechanical breakdown.
- GAP is not a leased car's warranty.
In most cases, GAP insurance is written into a lease contract. Your monthly payments will include this coverage. This might always be the case, so it's helpful to find out when you're filling out the forms if you'll need to get it or not.
How GAP Insurance Works for a Leased Car
If you have a total loss or theft of your car, your car insurance will only pay the car's market value at the time of loss. Cars will always be worth less than when you first drove it. This is because new car values drop the most in the first few years. In most cases, the market value of the leased car will be lower than the amount still owed on the lease contract.
According to Nationwide Mutual Insurance Company, a new car can lose close to half of it's value within five years at a low depreciation rate.
GAP coverage can help you cover the difference between what the insurance company pays you at the time of loss and how much you owe the lessor if something happens to the car. For instance, say that your lease payoff value is $20,000. The insured value of the car is $15,500. You also have a deductible of $500.
One day, your leased car is stolen. You contact your insurance agent, who tells you that you'll need to pay the deductible to the lessor. The lessor will also ask for the lease payoff value of the car. This means it wants the remaining $4,000 to release you from the lease.
If you have GAP insurance, you'll only pay the $500 deductible instead of the $4,500 early lease termination.
The Bottom Line
Although you do not own a leased car, you are responsible for returning it at the end of the lease. In addition, the car must be in good condition and not have any damages. Having the right insurance plans will help protect your leased car and keep you from paying for damages out of your own pocket if you have an accident or if the car gets stolen.