Is insurance higher on a leased car?

So you’ve decided to lease a new car rather than buy it outright, congratulations! You’re going to make a leasing company out there very happy. 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 whole financing vs. buying setup, 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. You’re going to discover that the types of coverage that are optional when you outright purchase a vehicle are actually requirements when you lease.

What are lease requirements?

There are certainly more things to consider when leasing a car than buying it. When a driver buys a car, they can do whatever they want with it as long as they make the payments. The driver owns the vehicle, so by right it’s their property.

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 associated with the car. This includes insurance, because the lease holder wants to have some sort of financial protection. Keeping their property safe is a priority. If you’re leasing a vehicle, you may wish to swap it out at some point; if there’s excessive wear or signs of an accident it’s going to take work to make the vehicle leasable again.

Auto lease companies typically have the following requirements listed in the contract. Most of which are going to be listed as simply ‘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. Not to mention the leasing company may require these coverage amounts as a stipulation to you getting your vehicle.

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.

Read More: Is insurance included when you lease a car?

Do you need GAP coverage?

This is one of those optional coverage types that arises when you’ve purchased a vehicle. However, 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. Under most conditions where a loaned vehicle is totaled, you’ll be happy to have GAP coverage. Looking at it from the business standpoint, setting minimum coverage requirements is a way to provide themselves and the drivers they lease with financial stability.

How can you reduce the cost of your insurance? 

It may not seem like you have a lot of leeway when it comes to the level of coverage required on a loaned vehicle, but there are still ways in which you can keep your auto policy affordable. Get insurance quotes online and speak with a local independent insurance agent to obtain quotes from several auto insurance companies. This way you can weigh your lease balance and what would be your premium cost together before making any decisions. You want your vehicle purchase to be a smooth process, and knowing what type of coverage you’ll need and how much you’ll be paying can take some stress out of the situation.

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, those additional requirements won’t break your bank.

Read more: New car replacement insurance vs gap insurance.