Is Insurance Included When Leasing a Car?
Demystify car lease insurance. Understand what coverage is required and your responsibilities when leasing a vehicle.
When considering a car lease, it’s common to wonder about costs beyond the monthly payment. A car lease allows you to use a new vehicle for a set period, typically two to four years, without the long-term commitment of ownership. While your lease agreement covers vehicle usage and often includes certain fees, it generally does not incorporate the cost of auto insurance. The lessee is solely responsible for obtaining and maintaining appropriate insurance coverage throughout the entire lease term.
Understanding Lease Insurance Requirements
Leasing companies, as the legal owners of the vehicle, impose specific insurance requirements to protect their financial interest. These requirements typically exceed the minimum coverage mandated by state laws for owned vehicles. Lessees are almost always required to carry what is often called “full coverage” insurance, which includes both comprehensive and collision coverage.
Collision coverage provides financial protection for damage to the leased vehicle from an accident with another vehicle or object, regardless of who is at fault. Comprehensive coverage, on the other hand, covers damage to the vehicle from events not involving a collision, such as theft, vandalism, fire, falling objects, or natural disasters.
Beyond physical damage coverage, lessors also mandate higher liability insurance limits than most states’ minimums. Common requirements for bodily injury liability are often $100,000 per person and $300,000 per accident, along with $50,000 for property damage liability. These elevated limits protect both the lessee and the lessor from substantial financial exposure in the event of an accident where the lessee is at fault.
The rationale behind these stringent requirements stems from the leasing company’s ownership of the vehicle. Since they retain the title, they bear the financial risk associated with any damage or liability claims. By requiring robust insurance, lessors ensure that their asset is adequately protected and that they are not left to cover costs if the vehicle is damaged or if a major accident occurs.
Essential Additional Coverage for Leased Vehicles
A particularly important type of coverage for leased vehicles is Guaranteed Asset Protection, known as Gap Insurance. This coverage addresses a specific financial exposure unique to leasing. Gap insurance pays the difference between the actual cash value (ACV) of a vehicle at the time of a total loss and the remaining balance owed on the lease agreement.
New cars typically depreciate rapidly, often losing a significant portion of their value within the first year. This rapid depreciation means that the vehicle’s market value can quickly fall below the outstanding lease balance, creating a “gap.” If the leased car is stolen or declared a total loss, the standard comprehensive or collision insurance payout will only cover the vehicle’s actual cash value. Without gap insurance, the lessee would be responsible for paying the difference between this payout and the remaining lease obligation, which could amount to thousands of dollars.
Many leasing companies require gap insurance as a condition of the lease agreement, recognizing the financial exposure this gap presents. Even when not strictly mandated, it is a prudent purchase for leased vehicles. Gap insurance can be offered by the dealership, an insurance provider, or sometimes even included within the lease agreement itself. It is prudent to inquire about its inclusion and cost, as purchasing it from an insurance company may be less expensive than through a dealership.
Integrating Insurance with Your Lease Agreement
Insuring a leased car involves steps that connect the lessee, the insurance provider, and the leasing company. Before taking possession of a leased vehicle, the lessee must typically provide proof of the required insurance coverage to the leasing company. This proof usually comes in the form of an insurance declarations page, which details the types and limits of coverage, the vehicle identification number (VIN), and lists the leasing company as an additional insured and loss payee. This ensures that any insurance payouts for vehicle damage go directly to the leasing company, as they are the legal owner.
In the event of an accident or total loss, the claims process differs from that of an owned car. The lessee must promptly notify both their insurance company and the leasing company. The insurance company will assess the damage and, if the vehicle is deemed a total loss, will determine its actual cash value. The insurance payout for the vehicle’s value is then sent directly to the leasing company. If this payout does not cover the remaining lease balance, gap insurance activates to cover the shortfall, preventing the lessee from paying the difference out of pocket.
As the lease term approaches its conclusion, maintaining continuous insurance coverage is important. The insurance policy should remain active until the vehicle is officially returned to the leasing company. Upon lease termination, the lessee can then adjust or cancel the policy for that specific vehicle. If the lessee opts to lease another vehicle or purchase the existing one, the insurance policy will need to be updated accordingly to reflect the new vehicle or ownership status.