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Do you need full coverage insurance on a leased car?

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The lowdown...
  • When you sign a contract to lease a car, you need to know the unique terms of the loan before you sign anything
  • If you’re leasing, you’re paying to drive the vehicle for the term and then you’ll give the car back to the owner
  • Since the leasing company owns the vehicle, the contract requires you to carry full coverage on the leased property
  • You can’t select extremely high deductibles when you’re leasing unless you get prior approval from the lessor
  • Unlike finance contracts, leasing companies can also require the lessee to purchase higher limits of liability

When it comes to buying a car, you can do it one of three ways.

  • Some people prefer to shop for vehicles listed for sale by owner on the private market
  • Others prefer to purchase dealership cars
  • Some consumers who see the advantage of leasing

While leasing has always been a viable option for businesses, record numbers of Americans are leasing autos today. As much as 31 percent of new car borrowers have chosen to lease over buy.

There are loads of reasons why leasing makes sense.

  • First off, you can get more car for less money.
  • Secondly, the interest rates for qualified buyers is extremely low.
  • Thirdly, you don’t have to sell or trade the car after the lease it over

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Before you lease, be familiar with leasing insurance requirements:

Understanding How Leased Vehicles are Registere

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When you lease a car, you’re not paying off principal and interest with the intentions of purchasing the car at the end of your contract.

Instead, you’re leasing the car to use it for a period of time. You aren’t the legal owner of the vehicle and that’s why the title will be in the lessor’s name.

Since the title is in the lessor’s name, it can get a bit confusing when it comes to who registers the car. In most states, the car can be registered in both the lessor’s name and the lessee’s name.

Typically, the contract calls for the lessee to register the car, pay all fees, and handle all registration transactions during the lease term. At the end of the lease, the lessee will have no obligation to maintain tags in their name.

Who’s responsible for maintaining insurance on the car?

Lease contracts may be long but they include detailed information that you need to know. Under the contract, the lessor will pass the burden of buying insurance onto the lessee.

As soon as you take custody of the car, insurance is no longer the leasing company’s responsibility.

If you put off buying insurance on your car, you’ll have to answer to two different parties.

  1. First would be the DMV because the agency will verify that you have active mandatory coverage on any car registered in your name.
  2. Second would be the leasing company because the carrier must see that you have active liability and physical damage coverage.

How does the lessor know that you have coverage?

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You have to provide your sales agent with proof of insurance before you can leave the lot. The representative will also ask buyers to sign a disclosure stating that they currently carry satisfactory limits.

Once you walk away, it would seem like it would be very easy to cancel your coverage without the lessor finding out.

Not only is it dangerous to remove coverage from a vehicle that you’re driving regularly, doing that is also against your contract.

Since the lessor requires borrowers to add the company as an additional insured, they will get something in the mail whenever coverage changes on the leased car.

That requirement means that they will get a notice when the policy lapses, is canceled, or when coverage is removed.

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Does it matter how much liability coverage you carry?

Liability limits are set by state officials. Some states require resident drivers in the state to carry very minimal limits of coverage to pay for third-party damage and others require higher limits.

You have to know what limits you must have according to the state law regardless of how you financed or purchased your car.

If you’re financing your car, the lender isn’t concerned with how much liability coverage you have. That’s why the lender is only listed as a loss payee and not an additional insured.

If you’re leasing, the lessor requires that you carry higher limits of liability than the state requires.

The most common liability requirements under lease contracts are:

  • $100,000 per person for bodily injury to others
  • $300,000 per accident for bodily injury to others
  • $100,000 per accident for property damage to property owned by others

Why do leasing companies care how much liability you carry?

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Lenders don’t care about your liability limits but lessors will. To truly understand why liability limits matter under a lease contract you have to know the state law.

In most states, state law will eliminate the lessor’s burden of carrying liability coverage if the lessee has high enough limits.

Since not having to purchase coverage saves the lessor a great deal of money, the contract has a whole section that says lessees need high limits.

Requiring these higher limits also protects the leasing company from being a secondary party in a lawsuit if there is a serious accident and the driver has low limits on their personal insurance.

What is full coverage under an auto insurance policy?

Full coverage is a term that’s thrown around a lot. It can be a misleading term that’s used in the industry because having a policy with full coverage doesn’t mean you’re covered for everything.

There are still limitations to a policy with full coverage.

In general, when you have full coverage under your insurance it means that you’re carrying first-party coverage to pay for damage to your own car. Full coverage consists of comprehensive and collision. Here’s what the coverage options pay for:

  • Comprehensive – will pay to repair or replace the leased vehicle if it’s damaged because of fire, theft, vandalism, glass breakage, weather, or flood
  • Collision – will pay to repair or replace the leased car if it’s damaged in a collision with any other object except a live animal

Is full coverage required under a lease?

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The lessor owns the car. They don’t check your driving record to see if you’re a safe driver so it does leave the company at risk. When you take custody of the car that’s being leased to you, there’s always a chance that you could crash it.

If you do, the lessor needs to know they will still get paid.

To qualify for a lease, you have to provide proof of income to show that you can pay your payments. The company doesn’t check to see if you have money put away to pay for expensive repairs in the future.

Requiring insurance makes a lot more sense. This is why full coverage is required on all cars that are leased or financed.

Are there restrictions on your deductible?

Not only must you carry comprehensive and collision, you must also comply with the deductible restrictions. Under the contract, it will probably say that your deductible for physical damage can’t be any higher than $500.

Some lessors allow $1000 deductibles on luxury cars because they are more expensive to insure.

It might seem a bit restrictive to say a lessor can’t choose how much they’re willing to pay for repairs in the event of a claim, but the restrictions are set to protect the lessor.

If someone carried a $2500 deductible and they couldn’t pay it, no repairs would be made on the car and the lessor would be out of money. GAP coverage wouldn’t even take effect because the primary insurer won’t pay.

Before you assume that it’s cheaper to lease a car than finance it, you need to estimate how much more it will cost to insure the vehicle with higher limits and lower deductibles.

It’s easier on you if you shop around first. Use our online comparison shopping tool to see how much the required coverage will cost and then make your final decision.

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