Car insurance for a leased vehicle
Leasing a vehicle, rather than buying it, is similar to renting an apartment. You enjoy a lower down payment, your warranty covers many of the repairs, and you can get a new car every few years. However, if you lease a vehicle, you’re not earning equity. When your lease is over, you have no stake in the vehicle and cannot sell it. Even though you don’t technically own a leased vehicle, you still need your own insurance for it. And there are some considerations specific to car insurance for leased vehicles worth remembering. Let’s explore.
- Leasing a car: pros and cons
- What coverage do you need?
- Gap insurance for a leased car
- What to do after your lease ends
- Ways to save on insurance for a leased vehicle
Why lease a vehicle?
The decision to finance or lease a car is a decision with a few considerations. Let’s review the benefits and downsides of leasing a vehicle.
Pro: Lower monthly payments than a financed vehicle
If the loan terms are the same, a lease may lead to lower monthly bills than a financing agreement. In addition to a more affordable downpayment, lease payments usually factor in depreciation of the vehicle.
Con: Equity opportunity cost
While monthly payments and fees due are lower, financing — and eventually owning — a vehicle is an investment. If it takes you four years to own your vehicle, you could still end up owning a fairly valuable vehicle with which you’re able to do whatever you want. With a lease agreement, you earn nothing towards the vehicle you made payments on.
Pro: More economical for infrequent drivers
Leasing a vehicle is great if you’re a low-mileage and low-maintenance driver. Because many leases have mileage restrictions and require vehicles to remain in good condition, many people find leases constricting. But if you don't drive too frequently, leasing could be a good decision.
Con: Maintenance of vehicle
Your lease contract will specify the condition in which the vehicle should be returned. You may be responsible for any property damage to the vehicle, however small. As you’re not the owner of the vehicle, you are responsible for returning it in the pre-specified condition.
Pro: Warranties and new vehicle alternatives
The last major benefit of leasing a vehicle is that you can choose a new car every few years. Although you may be responsible for minor maintenance occurrences such as oil changes and tire rotations, major mechanical issues will be dealt with through the warranty.
Lease car insurance requirements
Because you'll need to return your leased vehicle in the same condition you received it, you should remain properly insured for the duration of your lease agreement. See below common insurance coverage options for a leased car.
- Bodily injury
- Property damage
- Uninsured/Uninsured Motorist Coverage
- Personal Injury Protection/Med Pay (if required)
Carrying only liability coverage could leave you in violation of your lease agreement, as it would offer no physical protection in the event of an at-fault accident. In addition to these coverages, you may need:
Gap insurance is sometimes required for leased and financed vehicles. Gap insurance covers the difference between the market value of the car — accounting for depreciation — and what is still owed on the lease. In the event a leased vehicle is totaled, the driver would be responsible for the difference between the amount owed on the lease and what the insurance company pays out on a claim.
For a car insurance policy, the claim payout would account for the vehicle's actual cash value.
Is gap insurance required for a leased car?
Gap insurance comes with a few considerations. Confirm with your leasing company that this coverage is required. Some lease contracts include a Gap Waiver Provision. This forgives the difference between the amount owed on the lease and the amount paid out by the insurance company in the event of a major claim.
Not every insurance company sells gap insurance. For example, GEICO currently does not offer gap insurance.
You can purchase gap insurance from an insurance provider or the dealer through which you acquire your lease. Because the dealership’s coverage might be a little more expensive, it's always worth comparing prices.
What to do with auto insurance after a lease ends
While there's a lot to say about what your next steps are after your lease ends in terms of getting another vehicle, it's much more straight-forward when it comes to insurance.
- If you’re extending the lease: keep your insurance
- If you're trading in the vehicle for a new one: update your insurance with new vehicle information
- If you're buying the vehicle: remove the leasing company from the insurance and update your coverage and policy, if necessary
- Walking away: if you’re going car-free, just cancel your insurance! You might want to invest in non-owners insurance.
Buying your leased car
There are many reasons you'd want to buy your leased car after your term is over. The big reasons you'd want to buy your leased vehicle outright typically include:
- Financing the leased vehicle is a lower monthly payment than another lease agreement
- You've damaged the vehicle and are worried about the penalties
- You've surpassed the mileage restrictions and are worried about the penalties
- You like the vehicle and want to avoid another shopping/leasing experience
Whatever your reason, the process of buying your car out of the lease will be straightforward. Get a few estimates of the vehicle's value and wait until the end of your lease agreement. Buying your vehicle before the lease is over might result in additional fees. Your leasing company will most likely contact your 90 days before your contract is over to discuss the next steps. Be sure to inquire about discounts and incentives in order to get the best offer.
In terms of auto insurance, the only steps to take are evaluating your coverage (consider if you need gap insurance) and removing your leasing agency from your policy. If you are going to finance your previously leased vehicle, you will need to add a lienholder as an additional interest to your policy.
How to save on insurance for a leased vehicle
If you're already contributing to a monthly lease payment, you'd want to make sure your insurance premium is as low as possible as well. Let's break down our top ways to save on auto insurance at every stage of car ownership.
Pay smart
If you have the ability to the entirety of your premium upfront, you can save some money on your auto insurance. In 2018, the average driver lowered their premium by 5% — or $34 per standard six-month policy.
Because you cut out the cost of transaction fees and pay the premium at the start of your term, you could receive a lower premium.
Bundle
Bundling insurance policies earns you a multi-policy discount and reduces the number of insurers with which you have to deal.
Telematics
Telematics can be a great option for saving money while leasing a vehicle because of how they work. Telematics devices plug into your car and help your insurance company monitor the way you drive to generate a more accurate premium. Driving carefully and less often can result in a lower premium. Because a leased vehicle has mileage restrictions and you need to take care of the vehicle, this might be a good way for you to save. While this program isn't available in every state, here are some major insurers and corresponding usage-based savings.
Company | Estimated Savings |
Progressive SnapShot | Average of $130 |
Allstate Drivewise | Average of 10-25% |
State Farm Drive Safe & Save | Up to 15% |
Esurance DriveSense | Varies |
Nationwide SmartRide | Up to 40% |
Liberty Mutual RightTrack | Average of 5-30% |
Varies | |
Varies |
Learn more about telematics and car insurance.
Compare rates frequently
No matter which car ownership classification you fall into, it's usually worth comparing car insurance rates.
