Car Leasing and Lease Gap Insurance: What You Need to Insure Your Lease

Nicolas Cesare  | 

Like other large purchases, it’s difficult for the average person to buy a car in one go. Instead, you will probably need to pay a small lump sum when you first take possession of the car, and continue to make monthly payments until the value of the car has been paid off. When you make these monthly payments to the dealer who sold you the car, this is called car leasing.

There are handful of benefits to leasing over buying, but no matter which road you take, you will always be required by law to have insurance coverage for a new car. However, most leases have a very different, additional type of insurance requirement called gap insurance. Here’s everything that you need to know about getting insurance coverage while leasing and gap insurance for leased cars.

Does Car Leasing Include Insurance?

When you lease a car, the dealer or owner of the lease may try to sell your an insurance policy that comes bundled with your vehicle. While it’s tempting to one-stop-shop and walk out of the dealership fully insured, it’s worth taking a moment to pause and consider some other options.

First of all, remember that you do need insurance coverage for a new car, so leasing the car without any insurance policy at all is not an option. However, that doesn’t mean that you need to buy the first policy that’s thrown at you. Here are few things that you can do to get insurance on a leased car:

  • Work with an insurance provider, insurance agent, or third-party comparison tool to find an insurance plan. Pick out the car that you’re interested in leasing to get a car insurance quote on a policy for that vehicle.
  • Add your new vehicle to an existing policy. Depending on the exact terms of your insurance policy, you may have a grace period between the time you drive off the lot and the time you need to add your new vehicle to your policy. If you’re replacing an old car, make sure that you have your new car replace the old one on your policy as well.

What is Gap Insurance?

When you lease a car, you might notice that the cost of gap insurance is being included in your monthly payment. Gap insurance is different from ordinary car insurance, but when you lease gap insurance plays an important role.

If you have an ordinary car insurance policy and your car gets totaled, then insurance will provide coverage based on the current price of the vehicle, rather than what you paid for it. So if you bought your car for $15,000 when it was brand new, and it’s worth $12,000 when it gets into a collision, then you can only expect to receive $12,000 in benefits.

This depreciation in value matters a lot to a leasing company. They still expect you to pay the full value of the car that was agreed upon when you first leased it. However, if your car insurance only covers the value of the car after depreciation has kicked in, then the dealer will come up short. Gap insurance does exactly what it sounds like: it closes the gap between the sale value and depreciated value of the vehicle so that the dealer doesn’t lose money when a leased car is totaled.

Do I Need Gap Insurance to Lease a Car?

Most of the time a car dealership will require that you have gap insurance to lease a car, so it’s not up to you. However, don’t think about gap insurance as being forced upon you. Gap insurance plays an important role for leasing cars.

If your car is totaled or otherwise badly damaged, you are still on the hook for the full value of the car, even if it’s completely unusable to you. This is where gap insurance can bail you out — gap insurance will cover the value of the car that’s left out by depreciation. Together with your usual car insurance policy, gap insurance will help you pay off a leased vehicle that has been totaled. Remember that your car begins to depreciate in value as soon as it leaves the lot, so gap insurance is working for you the moment you close the deal and drive away.


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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.

This post was updated May 8, 2018. It was originally published May 9, 2018.