Q

Q

Does car leasing include insurance?

A

A

Car insurance is typically not included in a car lease contract, but your leased car will need to be insured before you can drive it.

Stephanie Nieves author photo

Stephanie Nieves

Published May 21, 2020

KEY TAKEAWAYS

  • Car lease agreements generally don’t cover the cost of car insurance

  • If you decide to lease a vehicle, you should expect to make separate monthly payments for renting and insuring it

  • Liability insurance is mandated for most registered vehicles, and your lessor will likely require you to pay for additional coverage, like comprehensive and collision insurance

While leasing a car has its advantages and disadvantages, leasing a car can get you behind the wheel of a newer make and model with advanced features and lower monthly payments than buying one. You can also return the car once your lease is up or trade it in for an entirely new one.

But lease agreements typically don’t include car insurance, and you’ll still need to be insured before you can start driving the vehicle. When you lease a car, you’ll be required to make monthly payments to your lessor for renting it and premium payments to your auto insurance company for financial protection in the case of an accident.

In this article:

How does a car lease work?

When you lease a car, you make a financial agreement with a bank or dealership to use it for an agreed upon length of time, kind of like a long-term rental. As the lessee, or the person leasing the car, you’ll make monthly payments to your lessor, who owns the vehicle and grants you the lease to borrow it.

At the end of the term, you have the option to return the car you’ve been leasing or trade it in for a different one. In some cases, you may be able to buy out the lease and keep the car, although the purchase option at the end of a lease isn’t always the best value.

How to lease a car

The steps to leasing a car are simple: First, identify the make and model of the car you’d like to lease, then compare leases from different car dealerships. The cost of a lease will depend on which dealership you go to, so you should shop around to find the best price.

The lease you get will also depend on your credit score and your risk profile. A score of 680 or higher and a history of safe driving can help you get a better deal. But if you’re a high-risk driver, you may have to pay more to lease a vehicle or you may be denied an agreement altogether.

Once you’ve found a reasonable deal, you’ll make a down payment to your lessor and then monthly payments over your lease term. The most common lease terms fall between 24 and 36 months, but lessees may be able to lease a car for longer or shorter periods of time.

Before your lease is up, your car will undergo a lease inspection and you will be charged for any damage or excessive use of the car. An inspector will check for things like scratches and cracks on the exterior of the vehicle, excessive wear on the tires, and any damage to the interior of the car such as tears or burns.

You have the option to return your leased car at the end of your term, trade in the vehicle and start a contract for a new one, or purchase the car you’ve been leasing.

Learn more about what happens at the end of a car lease

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Car insurance for leased cars

In all but two states, liability insurance is mandated for all registered vehicles, whether they are bought with a car loan or leased. Liability insurance covers other drivers’ expenses when you cause an accident, and the amount of coverage you’ll need varies by state. But, in general, drivers should have more liability coverage than what is required by law in their state. If you have the bare minimum amount of liability and cause damage over your amount of coverage, you will assume the cost of that difference which could result in tens of thousands of dollars.

Personal injury protection insurance is also required in 12 U.S. states and Puerto Rico. PIP coverage pays for expenses that incur when you, someone on your policy, or your passengers are in an accident, no matter who is at fault.

Leased car insurance requirements

No matter what the law requires in your state, lessors will most likely also require you to pay for additional car insurance, like comprehensive and collision coverage, which is recommended but optional for drivers insuring vehicles they own outright.

  • Collision coverage - This offers financial protection from damage to your car caused by a collision, no matter who was at fault. Lessors almost always require a minimum amount of collision coverage, but you may have a choice in your deductible amount.

  • Comprehensive coverage - Often purchased with collision coverage, comp insurance covers damage to your car that occurs when you’re not driving. Such instances may include vandalism, falling objects, extreme weather conditions, and animal damage.

  • Gap insurance - When you file a claim, gap insurance covers the difference between what your car is worth after an accident and what you still owe on a lease. If you totaled your leased car, for example, your collision insurance would only pay out the actual cash value, or ACV, of the car, which would still leave you on the hook for more lease payments even though you’re no longer driving the car. Gap insurance pays the difference so you can pay off the lease.

  • Uninsured/underinsured motorist coverage - This protects you from damage caused by uninsured or underinsured drivers, but it can also protect you if you’re the victim of a hit-and-run accident.

  • Original equipment manufacturer (OEM) parts - OEM insurance covers the cost of repairs and restoration charges for your vehicle using only the original manufacturer parts. If you choose to return your vehicle at the end of your lease, OEM insurance helps you return it in a similar condition as when you first leased it.

  • Additional liability coverage - Your lessor may require you to pay more than your state’s minimum liability coverage. This could increase your premium significantly.

Learn more about car insurance for a leased car

Should I lease or buy my car?

When you’re shopping around for a car, you generally have three options: You can buy a new or used car with cash if that’s within your budget, you can lease a car for a certain period of time, or you can finance a car with an auto loan until you’ve paid it off and own the car outright.

Someone who only needs a car for the relative short term, like someone planning to move out of the country in a few years, may choose to lease a vehicle, since owning it could be a bigger hassle in the long run. On the other hand, someone who drives from one state to another for work may be better off buying a car since leasing one would come with strict mileage limitations.

Your decision to own or lease a car will largely depend on your needs, but weighing out the pros and cons of each can help you make the best choice.

Pros of leasing a car

  • You can drive a newer car with advanced features
  • Requires less maintenance repairs than an old car
  • You don't have to sell it when you want a different car
  • You’ll have less issues getting rid of the car than if you owned it
  • You may make lower monthly payments and won't accrue interest
  • Your car will always be under warranty

Cons of leasing a car

  • You won't gain equity because you don't own the vehicle
  • You must remove any customizations before returning the vehicle
  • You'll have usage restrictions, including how many miles you can drive
  • Exceeding your driving limits and excessive wear and tear can result in extra charges
  • Breaking a lease can be difficult and as expensive as carrying it out
  • More expensive than buying a car in the long run
  • You must make a steady and consistent income

Pros of buying a car

  • You’ll own the vehicle and be able to keep it as long as you want
  • You can drive your car as often and as many miles as you’d like
  • Once you own the car, you’ll only have to pay for insuring it
  • You build equity which can be used toward a new vehicle
  • You’ll save more money than leasing in the long run
  • You can sell it or get rid of it once it’s paid off
  • You can customize your car to your liking

Cons of buying a car

  • Monthly payments may be higher because you have to pay off the entire purchase price of the car
  • Higher mileage and excessive wear and tear can depreciate the vehicle’s value
  • Charges to repair your car can be costly once the warranty expires
  • You can end up upside down on your car loan
  • Costs more upfront for down payments, taxes, and other finance charges

About the author

Insurance Expert

Stephanie Nieves

Insurance Expert

Stephanie Nieves is an Insurance Editor at Policygenius in New York City. She has a B.A. in writing and rhetoric and previously worked as an SEO & Editorial Associate. Her words can also be found on PayScale, Fairygodboss, and The Muse.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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