Insurance on a Leased Car Explained

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  • Insurance on a Leased Car Explained

Nearly everyone in the United States must have car insurance if they operate a vehicle. Estimates report that about one in four people in the country leases their cars.

Leasing a car is like renting your vehicle. A financing company owns your car and leases it to you, so you make monthly payments to them for the life of the lease. Then, when the lease ends, you can buy the car outright or return it to the dealership.

Like renting a house, leasing a car has its pros and cons. Leasing often allows someone to drive nicer cars than ones they would have to buy in full. You also can get a new vehicle every few years, and you typically don’t have to worry about paying for maintenance.

If you decide to lease a car, you still must get auto insurance on the vehicle. When you lease, car insurance requirements differ from those required by state law. Keep reading for a comprehensive overview of leased car insurance. 

How Does Insurance Work When Leasing a Car?

When leasing a car, the lender will require you to have full coverage for the duration of the lease. Full coverage protects the physical value of your vehicle. It typically consists of collision and comprehensive coverage, and some leases may require other forms of coverage in addition. You’ll also need to have liability insurance at all times.

Since leasing companies technically own your car, they want to protect their investment as best as possible. Many people don’t have several thousand dollars on hand to fully cover repairs on their vehicle if they get into an accident. So, lessors require leaseholders to maintain full coverage auto insurance to protect their investments in their cars.

Full coverage isn’t a type of insurance on its own, but rather a combination of collision coverage and comprehensive coverage. Auto collision insurance financially protects your vehicle from damage you can sustain in an accident, no matter who’s at fault. Comprehensive coverage protects your car from the damage it can suffer when no one is behind the wheel, such as wind damage, flood damage, theft, and more.

Lessors typically require both of these coverages. Some companies may also want lessees to carry higher liability limits than the state minimum. Liability insurance is mandated at the state level, and drivers must have it whether they lease or own their vehicle. You need to have liability insurance to legally drive.

The amount of liability insurance you need varies by state, but your leasing company may mandate even higher bodily injury or property damage limits than the state requires for your car lease insurance.

Leased Car Insurance Requirements

Your lease insurance requirements will vary depending on your state and leasing company, but you’ll always need proof of car insurance for a lease before you drive off the lot with your new ride. You’ll also need to add your lessor as an additional insured and loss payee on your policy.

Who Pays Insurance on a Leased Car?

You, the car buyer and owner, pay the insurance on a leased car. The dealership won’t let you leave with a car unless you have insurance. If you don’t know the details of the car you’re buying ahead of time, you can have your provider on standby until you decide. Since a car lease including insurance is pretty unheard of, most companies allow you to send them the details, and they’ll quickly input them into a policy, so you can have proof of insurance the same day you get your vehicle.

Add Lessor As Additional Insured

When leasing a car, your insurance carrier will need to send proof of insurance to the leasing company as well as the dealership. Additionally, your lessor will need to be added to your policy as an additional insured and loss payee.

An additional insured on an insurance plan can’t make any changes or file claims on your behalf. They will simply be notified any time you make changes to your plan, such as renewals, limit adjustments, and cancellations. 

Adding your leasing company as an additional insured enables them to verify that you’re maintaining full coverage on your vehicle for the life of your lease.

Add Lessor As Loss Payee

They also must be listed as a loss payee in most cases. This means that in the event of a physical damage claim on your vehicle, your insurer will make the reimbursement check out to you and your lender. In the case of a total loss, the reimbursement will go to your lender first. 

Both you and your leasing company have a stake in your vehicle, so signifying them as a loss payee ensures you both can get compensation from your provider if needed.

Meet Car Insurance Requirements 

Again, as we touched on earlier, full coverage is typically a leased car insurance requirement. Your lender and dealership will clarify what you need as part of your full coverage before you go anywhere. It will typically consist of collision and comprehensive coverage, and you may need a certain amount of liability insurance. 

Your lender may require a certain deductible amount on one of your coverages, too. Depending on your state, you may also need personal injury protection (PIP) or uninsured motorist coverage as part of your policy.

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Car Insurance If You Lease Vs. Buy

You’ll be required to have more car insurance on a lease than on a car you buy. If you buy a car outright, you’ll only be required to have liability coverage. If you lease a car, you’ll be required to have full coverage and whatever else your lender mandates, in addition to liability insurance.

If you buy a car in full, whether from a dealership or a private seller, you won’t need to have any insurance beyond the liability coverage your state mandates. Every state requires liability insurance except New Hampshire and Virginia. In those two states, you must demonstrate that you can meet certain financial thresholds if you want to forego liability coverage. 

Experts wouldn’t recommend carrying the minimum amount of liability insurance. Many people carry more, and many get full coverage even when not required. It’s better to be safe than sorry, and medical bills and vehicle damage can easily rack up tens of thousands of dollars after a severe accident. The minimum amount of liability insurance may not be enough to cover the injuries, and you’d have to cover property and car damage on your own without full coverage. 

If you lease, your lender will require full coverage in addition to liability insurance. It wholly protects both you and your lessor’s investment in your vehicle. This is also likely if you finance your car with an auto loan.

How Much Is Insurance On a Leased Car?

Insurance on a leased car will likely cost you between $150 to $350 a month, totaling between $1,800 to $4,200 per year. But, car insurance costs vary greatly by location, driving record, and more. Don’t be surprised if you pay slightly more or less.

Car insurance, in general, is affected by several variables. Insurers use many factors to calculate your risk and determine your premium accurately. Some of the most important things they look at are:

  • Age of driver
  • Driving record
  • Location
  • Credit history
  • Vehicle make and model

Younger drivers pay the most for insurance. Males under 25 tend to have the highest auto insurance premiums. Young men who want insurance on a leased car will probably pay more than middle-aged men for coverage.

Your driving record is another critical factor. An accumulation of accidents or tickets on your record will raise your premiums. Additionally, getting in an at-fault accident during your policy term can raise your rates at renewal time. 

Your credit history can also play a role. In most states, insurers consider policyholder credit history when determining premiums. Carriers believe people with lower credit scores tend to file more claims; thus, they charge them more to offset this financial risk. 

Vehicle make and model is another crucial factor in leased car insurance. Generally, newer cars will cost more to insure with full coverage than older, average cars because newer, more expensive models would cost more to repair after an accident. 

Does It Cost More to Insure a Leased Car?

It generally costs more to insure a leased car because you’ll be required to have extra coverage that you wouldn’t be forced to have if you bought a car outright. Additionally, high-end luxury vehicles may cost more to insure.

Car insurance for leased vehicles will probably cost more than insurance on a wholly owned car because leased cars require the additional coverage we mentioned. Someone with full coverage — plus potential add-ons — will be paying more than someone with just liability insurance.

Additionally, leased cars tend to be newer, and insuring a new vehicle may cost more than insuring an older one, especially if the new one is a high-end make and model. For instance, insurance on a newer leased BMW or Mercedes will probably cost more than insurance on a 2015 Honda or Nissan.

But, every situation is different, and the cost of insuring a leased car for someone might not be the same as someone else due to location, driving record, and more. Additionally, some people may be able to take advantage of discounts through their insurer that can lower premiums. 

For example, if the leased car is one of several cars on your policy, you should qualify for a multi-car discount. You may also be able to take a defensive driving course to save money. Newer leased cars are also more likely to have safety features that can reduce premiums. Always ask your provider what discounts you qualify for to see if you can avoid car insurance being more expensive when you lease.

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Does a Car Lease Ever Include Insurance?

No, a car lease doesn’t include auto insurance. You’ll need to find your own coverage to protect yourself, your vehicle, and others on the road. In some cases, a lease will include gap insurance, but this is a very different product.

A lease will never include the liability, collision, and comprehensive coverage required by your lessor. You’ll need to secure those by shopping around. Some dealerships or leasing companies may have suggestions for coverage, but you should always shop for yourself to find the best deal.

While you won’t find lease insurance, car leases may include the cost of gap insurance as part of the lease payments. Gap insurance only comes into play if you’ve totaled your car. The payout for your totaled car may not exactly equal the outstanding balance you have left in your payments since cars depreciate at different rates. If you still owe money after your insurance payout, your gap insurance can cover the amount you still owe.

The lessor may offer gap insurance as a one-time cost upfront, or they can roll it into payments. You can also sometimes get gap insurance through your auto insurance carrier, so be sure to ask your agent or provider if it’s something you’re interested in.

While you won’t find lease insurance, car leases may include

What Happens If You Drive a Leased Car Without Insurance?

Driving a leased car without insurance will violate the terms of your lease and will likely break the law. You’ll also be personally responsible for any damage or injuries you cause while driving the vehicle.

It will be difficult to drive a leased car without insurance because your leasing company should be notified of any changes made to your policy. Be sure you have the right information for your lessor listed on your plan at all times, so no communications get lost.

If you have a lapse in full coverage on a leased car because you stopped paying the premiums, your leasing company can force-place insurance on you. In worst-case scenarios, they may also try to repossess your vehicle. Force-placed insurance is the lender’s coverage, likely consisting of higher premiums for subpar coverage. Force-placed insurance is never your best option.

Getting found driving without liability insurance also carries severe consequences. You can face fines from your state, and you might get your license revoked or suspended. Getting your license suspended would be disastrous for your future car insurance premiums

Also, if you caused an accident while driving a leased car without insurance, you’d be financially liable for all damages and injuries you caused. Depending on the incident, you could be looking at a bill totaling thousands or tens of thousands of dollars for your vehicle damage, the other party’s vehicle damage, property damage, and medical bills. 

These are all things insurance on a leased car normally covers, so try your best not to drive a leased car without insurance.

The Best Insurance for Leased Cars

The best insurance for leased cars depends on your location, insurance needs, and financial situation. You must shop around to find the best insurance for you.

Keep in mind that the cheapest car insurance for leased cars might not be the best. Sometimes, it will be worthwhile to pay a little more to have all the right coverage in your policy for your lifestyle and situation. You may want a policy with an add-on that not every company offers, such as towing coverage or stacked coverages. You may also prefer the customer service of one company over another.

Or, you may choose auto insurance from the same company that insures your home even though it costs slightly more because you’d then qualify for a bundling discount that will save you money overall. 

Insurance decisions aren’t always clear, which is why knowledgeable insurance agents are so important. At Clovered, our team of licensed, independent agents is ready to help. We partner with some of the top auto insurance carriers in the country, and we’d love to help you find coverage.

For the most convenience, you can fill out our auto insurance quote form, and one of our team members will get back to you with more car insurance information. You can also call us at 833-255-4117 during business hours or shoot us an email at [email protected].

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The editorial content on Clovered’s website is meant to be informational material and should not be considered legal advice.

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