So you’ve decided to lease a new car rather than buy it outright. While there’s heated debate about which option is more cost effective in the long run, the insurance side of the decision is really a non-issue.
Insurance premiums can be higher on a leased car, but not for the reason you may expect. More on that in a minute. First, to understand the big picture, it is important to read up on how car insurance rates are determined.
Assuming all things equal…other than the financing (lease vs. buy)…there isn’t any difference in the cost to insure the vehicle. The real key here is whether or not all things can be equal, which may not be possible if you opt for the lease.
There are certainly more things to consider when leasing a car than buying it. When you buy a car, you can do whatever you want with it as long as you make the payments.
When it comes to the lease agreement, you have to worry about mileage limits, wear and tear costs, early termination and every other minor detail…which includes insurance.
Auto lease companies typically have the following requirements listed in the contract. Most of which are “options” if you buy the car outright.
Higher Liability Limits – Don’t expect to get away with purchasing a state minimum car insurance policy, which simply contains liability-only car insurance. The leasing company may require you to carry bodily injury and property damage liability limits of 100/300/50.
This requirement will result in a higher premium ONLY if you planned on purchasing lower liability limits, which really isn’t recommended.
Full Coverage (Physical Damage) – Pay close attention here. You will only be able to skirt full coverage, which includes physical damage coverage, if you pay cash for your new car. If you “buy” the car with a loan, you will not be able to opt out of this coverage. Your lender, known as a loss payee, will also require collision and comprehensive coverage.
However, the lease agreement may dictate that you have lower auto deductibles on these coverage types. Lower deductible guarantees a higher overall premium. Why? The lease company wants to be darn sure you can come up with the “minor” deductible to repair damage to THEIR car.
They rightfully assume a higher deductible may cause too much financial trouble for you and cause moral hazards when it comes to reporting and repairing damage.
Don’t Forget the Gap Coverage
Most lease agreements include GAP coverage to protect their financial interest in your car. Gap coverage is basically an insurance-esque coverage you purchase and pay for to protect their money.
It may not sound fair put that way, but if you owe more than the car is worth (which is common for new vehicles) you’ll be happy if your car is totaled and you don’t have to pay the difference between what you owe and the vehicle’s actual cash value.
How to Reduce the Cost of Insurance
You have a better chance of lowering your overall lease insurance costs by doing this. Even with the extra insurance requirement involved with car leasing.
Read more: New car replacement insurance vs gap insurance.