When you lease a vehicle, you may be required to have gap insurance as part of the lease agreement. This coverage can help you avoid costly out-of-pocket expenses if you get into an accident that seriously damages or totals the leased vehicle. Learn more about a vehicle lease, gap insurance, how it works, and the average cost for this coverage.
Do You Have a Vehicle Lease? Gap Insurance Explained
If you have a vehicle lease, gap insurance is coverage that protects you if your leased car becomes totaled or damaged in an accident. If you get into an accident while driving a leased vehicle, the repair costs may be more than the car’s worth, which is the maximum amount insurers will reimburse you for damages. That’s because leased vehicles tend to be newer models that depreciate quickly in value. Suppose significant damages to the leased vehicle occur during an accident. In that case, gap insurance will cover the difference between the value of the car and the amount you still owe on the lease.
What to Do With a Vehicle Lease: Gap Insurance Coverage
If you lease a car, there’s a good chance the lessor — the dealership, leasing company, or another entity leasing you the vehicle — will require you to have gap insurance. Many lessors will include gap insurance in your lease payments automatically. Check with the lessor before you purchase insurance or sign a lease agreement. If you have a vehicle lease, gap insurance may be something you’ll have to pay.
If gap insurance is optional for your lease, it may still be beneficial to purchase this coverage, especially if you put a low amount down on the lease. When you owe more on your lease, it’s more likely you will pay out-of-pocket costs if the vehicle becomes damaged or totaled in an accident. Like a vehicle you finance, the difference between the car’s worth and the amount you may owe after an accident decreases as you make regular payments. Depending on your lease, you may only need to have gap insurance for a short time.
Vehicle Lease, Gap Insurance, and How It All Works
If you’re ever in an accident with a vehicle you lease, gap insurance will cover the difference, or “gap,” between the vehicle’s actual cash value (ACV) and the amount you owe on a lease. After an accident, insurers will determine the ACV of the leased vehicle based on its current worth. According to CARFAX, a vehicle can lose more than 10% of its value in the first month after you drive it home. If your vehicle is damaged or totaled early in the lease agreement, the gap between the car’s ACV and the amount insurers will pay could be thousands of dollars.
When you have a vehicle lease, gap insurance will cover the amount of this difference so that you don’t have to pay out-of-pocket costs. Typically, you’re eligible for gap insurance if you’re the original owner of the leased vehicle. Gap insurance usually doesn’t cover expenses related to leasing penalties, past-due payments, or warranties.
For example, if you lease a vehicle with a $15,000 payoff and it gets damaged in an accident within the first three months, the ACV of the car may now be $13,500. That’s a $1,500 gap amount. If you have a $500 deductible on your insurance policy, your auto insurer will pay you or the lessor $13,000 for the car’s value. With gap insurance, you will only be responsible for paying the $500 deductible. Without gap insurance, you will have to pay for the entire gap and the deductible, which is $2,000.
Vehicle Lease, Gap Insurance, and Its Costs
When you have a vehicle lease, gap insurance costs can vary based on your lessor or car insurance company. Some lessors will automatically roll gap insurance into your lease payment, while others will allow you to purchase it separately as part of your insurance policy. Car insurers may offer gap insurance at a lower cost than a dealership. According to the Insurance Information Institute, most car insurance companies will add gap insurance to your collision and comprehensive coverage for about $20 per year, making it an affordable addition to your policy.
How To Buy Gap Insurance
If you’re required or wish to buy gap insurance for your leased vehicle, you can purchase it in one of the following ways:
- From an insurer: Many car insurance companies offer gap insurance, but not all do. If you want to buy gap insurance from an insurer, check with your company or get quotes from other insurers to include it in your policy.
- From another company: Some car insurance companies offer gap insurance as a stand-alone policy. If your auto insurer doesn’t provide this coverage, purchasing gap insurance from another company can be a good option.
- From the lessor: Many lessors, including dealerships and leasing companies, will include gap insurance in your lease payments. With this option, you may pay interest on the cost of gap insurance, making it more expensive than purchasing it from an auto insurer.
What Other Insurance Do You Need for Leased Vehicles?
In addition to gap insurance, you may want or need several other types of insurance for a leased vehicle:
- Liability: Nearly every state requires drivers to have liability insurance, which covers injuries or damages to another person if you cause an accident. A lessor may require you to have higher liability coverage amounts than your state minimum.
- Collision and comprehensive: Many lessors will require collision and comprehensive insurance. This coverage pays for repair costs to the leased vehicle if it becomes damaged in an accident or another event, such as a fire or vandalism.
- Excess wear and use protection: This coverage pays for costs to repair the vehicle if it has wear and tear beyond what’s considered normal at the end of a lease. It’s usually optional, although it can help you avoid costly expenses for damages.
Leasing a car can be a good option for many people. With a vehicle lease, gap insurance can help protect your vehicle if you’re involved in an accident. Check with your lessor to understand the requirements for gap insurance before you sign a lease agreement. This coverage can give you peace of mind when you’re behind the wheel of your leased vehicle.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.
