After that head-wracking decision to finally lease a car instead of buying it, and hours poring over your lease contract, you’re now faced with another conundrum: the complicated terms and conditions of the auto insurance required for all leased vehicles. On top of that, you have the hidden costs of the auto insurance not specified in the contract (but still legal, as they are implied) and the consequential costs if your “total” your vehicle to worry about.
As such, let’s understand this auto insurance enigma step-by-step, by beginning with the basic requirements for auto insurance for leased vehicles.
What is Required of Auto Insurance for Leased Vehicles?
In general, auto insurances for leased vehicles require you to purchase more than the minimum liability coverage legislated by your state. Commonly known as the 100/300/50, you’ll be required to purchase $100,000/pax worth of liability coverage, $300,000/accident for injuries sustained, and $50,000 for damages to property. As a comparison, the cost of the normal minimum liability coverage is about a quarter of this.
In addition to these already astronomical costs, you’ll be required to purchase comprehensive and collision insurances, which covers arson damages, damage arising from civil disorder, theft of vehicle, vandalism and animal collisions.
If you were unlucky enough to get into an accident, you would have heaved a sigh of relief because most of the costs will be borne by your insurer. However, you must make sure that the repairs have been done properly – if the repairs were shoddily done, you might have to pay for “excess wear-and-tear” when you return your vehicle to the lienholder. You are required by contract to return the vehicle in the exact same condition as when it was leased to you.
After repairs have been done, check that the paint job (if any) is clean, and the color is the same as what it was previously. In addition, check that the tires are still of the same brand and make, and that the parts that are replaced are form the original equipment manufacturer. If not, you will have to replace any of these parts with the original parts found in the leased vehicle.
But what if your vehicle has been deemed “totaled” by your insurer? For many insurers, a car is “totaled” when the repair costs for your car exceeds 70% of the vehicle’s current worth. As such, if your car is unluckily classified as “totaled” by your insurance company, whatever the insurance company pays out will make little difference to you; all the money will go to the lien-holder. In addition, you will have to top up the payment with your own cash, as the payout will definitely not be enough to satisfy the amount specified in the lease contract in the event of an accident.
This is where gap insurances come in. Gap insurances pay the remaining amount you have to pay to the lien-holder when you “total” your vehicle, after the insurer has paid the stipulated amount in the insurance package. As such, you’ll be relieved of the debt that you will still be in if you did not purchase gap insurance. Without gap insurance, you’ll be unable to finance another lease if you cannot pay up the debt. Gap insurances are important, even though the premiums cost a bomb. It’ll do you good to scout around for gap insurances if your current vehicle is not insured by one.
One important thing to remember is that to be eligible for gap coverage, some lease contracts require you to already be insured by certain insurance coverage, such as the comprehensive and collision coverage. Without them, you will not be able to claim the insured sum from your gap insurance coverage.
Even though gap insurances are costly, it is vital for a leased-car owner to buy this coverage for additional financial security. You are required to buy many other coverage such as comprehensive and collision coverage, but these costs are peanuts when compared to the extravagant costs you will incur when your car is deemed “totaled” by your insurer.
You must make an informed decision before buying or leasing a car. A car lease contract makes it compulsory for you to buy expensive levels of liability, many types of coverage, and the costly gap insurance. Even though a robust coverage makes your financial life more resilient to suddenly financial setbacks, your financial flexibility is compromised as your money are constantly used to pay for these premiums.
Therefore, always do up calculations before you buy your leased vehicle. Do not make a wrong choice at this juncture – you will have to pay for it years down the road.