One of the most oft-cited justifications for leasing a car is the ability it provides to drive “more car” for less money. This works because you’ll only pay for the depreciation the car incurs during your lease term, rather than paying the entire purchase price of the car.
However, there are certain tradeoffs you must also accept. You’ll be limited in terms of the number of miles you can drive annually, you’ll have to take really good care of the car and you’ll have to pay more for insurance.
Why is car insurance more expensive when you’re leasing?
Let’s take a look.
How Leasing Works
While much of the process of leasing a car is the same as buying one, the difference is the leasing company retains ownership of the car.
In other words, you’ll shop for the car the same way you would if you were buying it. You’ll negotiate the purchase price the same way. You’ll make a down payment. And, you’ll drive the car largely as if you own it.
However, you’ll do all of those things on behalf of the leasing company that provides the money to purchase the car from the dealer.
You’ll also agree to keep the car for a specific amount of time. And you’ll agree the car will be worth a set amount when that period elapses. You’ll also have the right to purchase the car for that amount at the end of the lease term.
Insurance Requirements Are Different for Leasing vs. Buying
One of the most important things to remember when you’re considering how to lease a car is you do not own the car. Instead, you’re driving an automobile the leasing company owns. As such, you must adhere to its requirements in a number of different areas. We covered most of them above, however, leasing companies are also picky about insurance.
Maximum Coverage Is Required — You might be perfectly comfortable carrying minimal insurance on a car you own, but the leasing company wants its investment protected as much as possible. As a result, it will insist upon $100,000 per person of liability coverage and $300,000 per occurrence. It will also want to see at least $50,000 in liability coverage.
In contrast, the minimums in these areas are typically somewhere around $25,000 to $30,000 in total liability coverage and $5,000 for property damage. Leasing companies also mandate collision coverage as well as uninsured motorist protection.
Gap Insurance — Another coverage safeguard baked into many leasing agreements is Gap insurance. This ensures the potential difference between the market value of the car and any outstanding balance owed on it will be covered should the vehicle suffer an incident precipitating it being declared a total loss.
As you might imagine, the more coverage you buy, the higher the price will be. After all, the insurance company, like the leasing company, must ensure it’s protected as much as possible as well. The more they charge for coverage, the better shot they have at being profitable — even if you file a claim.
Leasing Can Still Be a Good Deal
With all of that said, there are a number of discounts for which you might qualify to help bring the price of a policy down somewhat. Further, you could still save money each month with a lease vs. a buy — even with the higher insurance costs — if you shop carefully for the vehicle.
Now that you understand why car insurance is more expensive when leasing, it’s a good idea to check with your carrier for a quote before entering a lease agreement to be sure you’ll come out ahead.