Driving brand new cars every couple of years with low monthly costs is a great option to have, but all that money you save won’t mean anything if you end up having to pay huge out of pocket expenses after an accident.
Before signing any lease agreement, it’s important to understand how to get appropriately insured so that when you are involved in a collision, you can get the vehicle repaired or replaced at little to no cost. Wouldn’t you rather be putting that money toward your next vacation?
When you lease a car, you are still responsible for carrying insurance on it to legally drive. Just like when you purchase a new car outright, you are required by law in most states to be insured the moment you drive it off the lot.
Choosing insurance for a leased car is much the same as a purchased vehicle, but there are a few additional factors to consider before finalizing your lease.
Even though you don’t own the car, you are responsible for paying the debt and fulfilling your contractual obligations outlined in your agreement if you suffer a collision or total loss of the vehicle.
Thus, it is vital that you are protected in these unfortunate circumstances to lessen your financial risk. For that reason, we are going to discuss how auto insurance applies to leased vehicles, break down some of your mandatory coverage, and discuss how to protect yourself when insuring a leased vehicle. Want to know more about auto leasing? Read more here about how to get the most out of your auto lease.
Understanding Leasing Insurance Obligations
When you enter into a lease agreement, you are promising to return the vehicle in good condition, minus normal wear and tear. For this reason, you are responsible for maintaining and repairing the car, and in the event of a total loss, reimbursing the leaseholder for the remainder of the purchase price.
Having adequate insurance is just as, if not more important to those who choose to lease. Though the leaseholder is being repaid instead of you personally, the result is the same. Not having the right coverage could cost you thousands.
Minimum Coverage and Leasing
The majority of states require minimum amounts of coverage. The exact requirements vary by state. For more information on state laws regarding insurance coverage, contact your state’s transportation authority.
These mandatory coverages usually include various liability policies and personal injury protection. Mainly covering damage that you cause to persons or property when you are at fault for an accident. These laws exist to protect every motorist from being injured or losing property without being compensated.
However, when leasing a car, you won’t be allowed only to have the minimum amount of coverage. The leasing company will likely require you to carry collision insurance and comprehensive insurance.
Collision insurance is exactly what it sounds like; it covers the damage your car suffers after a collision with another vehicle or any other object.
Collision insurance covers you when you are at fault for the accident. When the collision is another driver’s fault, your insurance will try to collect the money they paid you from the other person’s insurance company and reimburse you for the deductible.
Keep in mind that your collision coverage will carry a separate deductible from your comprehensive policy.
Comprehensive insurance covers damage or loss to your vehicle caused by just about anything that is not a collision. Theft, fire, hitting animals and natural disaster are a few examples of incidents this coverage covers.
These two additional coverages are almost always required by leasing companies to protect them from significant financial losses. Even on the off chance that they weren’t, it would be smart to purchase them anyway.
Additional Coverage to Protect Yourself When Insuring a Leased Vehicle
There are a couple of policy options available to drivers of leased vehicles that are worth considering.
Gap insurance is an optional policy that covers the “gap” between the purchase price of a vehicle and the vehicle’s current market value. This coverage is even more important for lessees than car buyers because when buying a car, a down payment can be made to offset the gap and see the buyer protected when unforeseen circumstances cause their vehicle to be totaled.
While you can make a down payment on a lease, this serves to lower the monthly payments by reducing the amount of monthly interest paid and is usually not reimbursed when the vehicle is totaled.
When you lease a car, even though you aren’t purchasing it, it still has a purchase price. You will be responsible for that amount in the event of a total loss. Because a car’s value depreciates the moment you drive it off the lot, it’s wise to have gap coverage so that you don’t owe the dealer thousands more than the insurance company will pay.
In some cases, the leaseholder may require you to have gap insurance, and sometimes the cost of the coverage will already be included in your lease payments. According to the Insurance Information Institute (III), this happens because dealers will purchase a “master policy” for their entire fleet of leased vehicles, then charge to include a “gap waiver” in your agreement. Be sure to ask your leaseholder about gap insurance, and if they did not already include it, consider purchasing it from your insurance provider.
OEM Parts Coverage
Many lease agreements include a requirement that any repairs conducted during the lease term be done using Original Equipment Manufacturer (OEM) parts. This means that you must replace damaged parts with ones identical to those used by the vehicle’s manufacturer.
Unfortunately, most insurance policies don’t stipulate what parts can be used for the repair, and third-party components cost 20-50% less than originals. When this happens, the lessee is responsible for paying the difference.
The good news is, many insurance companies offer an OEM parts coverage as an option, sometimes at a minimal additional cost. Before you sign your lease agreement, ask your dealer whether they require OEM parts and if so, contact your insurance company to ask about this option.