Insurance Coverage Requirements for Car Leases

Car leases provide an effective method of keeping you in a new car for about the same monthly cost or less as buying. But there are financial liabilities with car leases even though the leasing company still owns the car. To protect you and their investment in the car, lease companies require that you have insurance to cover the car and possible personal injury. The following outlines the type of insurances typically required by car leases, and includes additional insurance you might not be required to have but should consider.

How a Car Lease Works

Car leases require an initial outlay to cover typical closing costs of a car purchase such as tax, title and license fees. Your monthly payment after that is calculated based on the cars expected value at the end of the lease term. In other words, car leases charge you for the depreciation on the car.

Your payment can vary widely depending on how much you pay initially, how many miles you plan to drive annually, the initial value of the car and the length of your lease.

Collision Insurance

At a minimum, car leases require that you have insurance in sufficient amount to cover the replacement of the car should you damage it. It is typical to require that you have comprehensive and collision insurance with a maximum $500 deductible.

Personal Liability Insurance

You will also be required to have personal liability insurance. Because the lease company actually owns the car, the company could be dragged into liability issues if someone is hurt by the car even though you are the one driving when it occurs.

You can expect to be required to have personal liability insurance of about $100,000 per person and at least $300,000 per accident.

Gap Insurance

Gap insurance fill a specific function in the car insurance industry, as the name implies, it fills a "gap" left by traditional auto insurance. It is not only for car leases, but can be a good idea as well for any financed car.

Not all car leases require gap insurance, but even if you are not required to have it, it may be a good idea to get it.

What is gap insurance? As an example, if you lease a new car that is worth $20,000 and insure it for its current value, you could be left owing more on the car than your insurance will pay if it is totaled. How does that work? It's possible your new car could be totaled within months of your buying. The insurance company will assume a given amount of depreciation and assume a current market value for the car. If that amount is less than the depreciated value as calculated by the car leasing company, you are liable for the difference.

With gap insurance, it is also important to know that typically you must be current on your car lease for the insurance to be in effect.

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