Do Auto Leases Have Car Insurance Requirements?
These days it seems like consumers switch cars as often as they swap cell phones. According to Experian Automotive, there’s been a large increase in the number of new car sales financed with leases, jumping from just 10 percent in 2009 to 28.4 percent in the last quarter of 2013. Average lease terms have dropped from 42 months to 36, with 24-month leases becoming increasingly common. Leases have become less expensive in recent years, which may explain their growing popularity.
Did you know that insurance requirements can be significantly different for a leased vehicle? Total insurance costs may be higher with a lease, which eats into the ‘savings’ of a lower monthly payment. Before signing on the dotted line, here’s what you need to know about auto insurance for leased vehicles.
Auto Lease Insurance May Differ From Car Ownership Insurance
When you purchase a vehicle, you own it, and once you’ve met liability coverage requirements, you’re able to choose how much insurance you’d like to have (or not) in order to protect and maintain the vehicle. This isn’t the case for a leased vehicle. When you lease, you don’t actually hold the title to the vehicle – the leasing company (or “lessor”) does. You’re paying to operate and drive the vehicle during the agreed-upon duration of the lease. Because the leasing company owns the vehicle, they’re allowed to impose their own insurance requirements, which may be more than what is required by law.
Many leasing companies do embed special insurance requirements in the lease agreement, and it’s easy to see why this is common practice. Your investment in the leased vehicle is partial and temporary, as the asset continues to be owned by the leasing company. Even though you’re probably going to give the car back at the end of the lease, they still want to protect it while you’re driving it so that it comes back in great shape. And in this arrangement the leasing company doesn’t have any incentive to go small on insurance requirements; they own the car (and get the benefit of added protection) but you’re paying for the policy. When someone else is picking up the check, why not order dessert?
Here are some ways the insurance requirements in a lease may differ from traditional car insurance requirements:
- Liability: In order to drive any vehicle off the lot or register it, you must first purchase minimum liability insurance as required by your state. Many leasing companies will require you to carry a liability limit that’s higher than the state minimum, meaning you’ll be paying a higher premium on your leased vehicle insurance.
- Full Coverage: You’ll be hard-pressed to find a lien holder that doesn’t require you to carry full coverage, also known as physical damage coverage. Full coverage consists of both collision and comprehensive coverage. It’s also common for the lease agreement to set limitations on the deductible amount for both types of coverage. This means that auto lessees are unable to engage in the common practice of strategically raising deductibles to save money on premiums.
- Gap Coverage: Most auto leases require gap coverage. If you owe $20,000 and the vehicle is worth $17,000, you’ll face a $3,000 gap in the event that the car is totaled, because the insurance company will only pay you market value. Gap coverage protects you from the gap between what you owe on the lease and what the car is currently worth. So, in this hypothetical your gap coverage would pay the difference of $3,000 to the holder of your lease.
What Happens If You Don’t Carry Appropriate Coverage
It is difficult for a leasing company to enforce its insurance requirements. However, failure to carry the appropriate and agreed-upon insurance can lead to stiff penalties or worse. Failing to carry the required insurance may even void your lease agreement altogether, which could result in your car being ‘recovered’ (seized) and leave you without a refund (and possibly with a bill for processing expenses).
Consider the Financial Impact of Insurance Requirements Before Leasing a Vehicle
Let’s suppose that, prior to entering into a lease for a new car, you owned a fully-paid 2000 Toyota Corolla and carried the minimum liability coverage required by your state. You might pay anywhere from $600 to $1,000 per year on car insurance so long as you have a clean driving record. If you upgrade by leasing a brand new Acura, your annual car insurance rates could easily double or even triple because of the higher insurance requirements imposed by the lease agreement.
Auto leases seem like a great deal because they usually feature very low down payments and lower monthly payments compared to purchasing. But many drivers end up unhappy with their leases because the cost of the insurance is unexpectedly high. Leasetrader.com found that nearly five percent of car lessees try to get out of their lease specifically to avoid the burden of higher insurance costs.
Trying to get out of a car lease is difficult and expensive. Even if the leasing company allows you to terminate the lease (perhaps you’re able to find someone to take it over, or you manage to come up with the money to buy the vehicle, assuming that’s permitted under the lease agreement), you may still have to pay early termination fees. Looking at the full cost, abandoning your lease may not save you much money over simply paying for the insurance.
Contact Your Insurance Company Prior to Leasing
To accurately calculate how much your newly leased vehicle will set you back, contact your car insurer to get some estimates of what your rates could be before signing a lease agreement. During the quoting process, play around with coverage limits and varying deductibles for specific vehicles. The more information you have on hand, the better. Knowing a vehicle’s VIN may help you get the most accurate quote. Doing your homework can prevent you from being blindsided by the heavy insurance requirements in a lease and a much higher total cost than you anticipated.