Do You Need Gap Insurance on a Lease?
Last Updated on October 29, 2022
If you’re leasing a vehicle, then you may need gap insurance.
Some lessors require gap insurance, while others do not. Some drivers also like gap insurance for peace of mind.
Today, we’re explaining everything you need to know about whether or not you need gap insurance on a leased vehicle.
Table of Contents:
- Most Leased Cars Require Gap Insurance
- How Gap Insurance Works on Leased Vehicles
- How to Check for Gap Insurance on Your Leased Vehicle
- Should I Buy Gap Insurance on My Leased Vehicle?
- You Can Buy Your Own Gap Insurance to Save Money
Most Leased Cars Require Gap Insurance
In most cases, the lessor (the person lending the vehicle) requires gap insurance on the vehicle.
In fact, many lease agreements have gap insurance built into your payments. If you pay $500 per month to lease a vehicle, then $25 of your payment may go towards gap insurance.
Gap insurance acts as an extra layer of financial security for the lessor and the driver. As your car depreciates in value, it eventually is worth less than the amount owing on your lease. In this situation, gap insurance covers the “gap” between the value of your vehicle and the amount you owe for the vehicle.
Many drivers carry gap insurance when financing a vehicle. However, gap insurance may also be a smart idea when leasing a vehicle – and it’s often required as part of your lease.
How Gap Insurance Works on Leased Vehicles
Gap insurance covers the difference between the actual cash value (ACV) of your vehicle and the amount remaining on your lease.
If you are involved in a major accident, then you may need to pay all remaining lease payments. Your insurer provides you with a check for the actual cash value of the vehicle, which is its value minus depreciation. However, this value may be much less than the amount remaining on your lease.
Let’s say you have $15,000 of remaining lease payments on your vehicle. However, your insurer deems the vehicle to have an actual cash value of $12,000. In this situation, you owe the dealership $15,000 but only have a check from your insurer for $12,000, leaving you with a gap of $3,000. Gap insurance would cover this gap. If you don’t have gap insurance, then you must pay this gap out of pocket.
Gap insurance may be particularly important if you:
- Made a small down payment for your vehicle
- Have a long-term lease
- Value peace of mind
- Are leasing a vehicle that depreciated rapidly
- Drive a vehicle with a significantly lower actual cash value than the amount remaining on your lease
How to Check for Gap Insurance on Your Leased Vehicle
If you are leasing a vehicle, then you may already have gap insurance. Many leased vehicles include gap insurance as part of your ordinary monthly payment.
Before buying third-party gap insurance, check if you already have gap insurance. Otherwise, you may be buying extra, unnecessary coverage.
Here’s how to check if you already have gap insurance on a leased vehicle:
- Check your lease agreement and look for any mentions of gap insurance
- Contact your dealership or financing company and ask if you have gap coverage
If your lease doesn’t require gap insurance or include gap insurance, then it may still be worth it to buy gap insurance.
Should I Buy Gap Insurance on My Leased Vehicle?
Many drivers buy gap insurance on leased vehicles for peace of mind. Gap insurance could save you thousands of dollars after a total loss insurance claim. It can help you avoid paying thousands of dollars out of pocket because of a single mistake.
Some of the things to consider when buying gap insurance include the following:
Does your lease require gap insurance? First and most importantly, check if your lease requires gap insurance.
How much was your down payment? If you made a small down payment for your leased vehicle, then gap insurance is more valuable. A small down payment means larger monthly lease payments and a greater balance remaining at the end.
How long is your lease term? Similarly, if you have a long lease term, you could owe a significant amount for your leased vehicle. If you get into a major accident within the first few months of leasing the vehicle, then you could be left with thousands of dollars in extra costs.
Are you leasing a luxury car or other specialty vehicle? Some cars depreciate faster than others. If you are leasing a luxury car or a truck, for example, then your vehicle might depreciate significantly as soon as you begin leasing it, which makes gap insurance more valuable.
How much money do you owe on the lease? If the value of the lease is less than your car’s actual cash value, then you don’t need gap insurance. Gap insurance is designed to cover the gap between a vehicle’s actual cash value and the amount owing on the lease. After a few years of leasing a vehicle, there may not be a gap, which makes gap insurance unnecessary.
Do you value peace of mind? Some drivers are willing to pay a few extra dollars per month for peace of mind, while others are not. Even if you don’t require gap insurance, you may want to buy gap insurance for peace of mind. A single mistake within the first few months of leasing a new vehicle could cost you thousands of dollars in out-of-pocket costs, and you may be significantly underinsured.
You Can Buy Your Own Gap Insurance to Save Money
Your vehicle lease may include gap insurance. However, some drivers buy gap insurance through their own insurer to save money.
Here are some of the reasons to buy gap insurance from your current insurer instead of your dealership or lessee:
- Your dealership or lessee may bundle gap insurance payments into your vehicle lease.
- In many cases, you can save money by dropping your dealership’s gap insurance coverage and buying from your own insurance company.
- Your own insurance company provides more affordable gap insurance because you’re bundling it with existing coverage
- Not all insurers offer gap insurance, so check with your provider before making the switch
- After switching gap insurance, provide proof of insurance coverage to your dealership or lessee, as they may require it to avoid violating the terms of the lease
Final Word – Gap Insurance for Leased Vehicles
You generally need gap insurance when leasing a vehicle. In fact, many vehicle leases have gap insurance built in, which means you may already be paying for gap insurance.
If you don’t have gap insurance, then it may be worth it – especially in the first few months or years of leasing a new vehicle. New vehicles decline rapidly in value, and you could owe significantly more on your lease than you would receive from your insurance company in a total loss incident.
Contact your dealership or lessee to determine if you have gap insurance on your leased vehicle. Or, call your insurer to add gap insurance to your vehicle.