Insurance works differently for leased and financed cars. In this article, we’ll cover everything you need to know about how to get a leased car insured, and which coverages are mandatory.
(For personalized guidance on insuring a leased or financed vehicle, call our Chicago agents at 773-202-5060.)
What Insurance Do You Need for a Leased or Financed Car?
When you buy a car with cash or pay off your loan, you’re free to choose the minimum insurance allowed by your state. However, if your car is leased or financed, the leasing company or lender will require additional coverage. In fact, most lenders insist you carry what they often call “full coverage” on the vehicle. Full coverage usually refers to three key components of auto insurance:
Liability coverage
Pays for injuries or damage you cause to others. This is required by law in nearly every state for any car on the road. State minimum liability limits vary (for example, Illinois requires at least 25/50/20 coverage). If you’re leasing, many companies actually require higher limits, commonly $100,000 per person and $300,000 per accident for bodily injury, and $50,000 for property damage. These higher limits ensure that if you cause a serious accident, there’s enough insurance to cover third-party claims, which also helps protect the leasing company (since they technically own the car).
Collision coverage
Covers damage to your car from a crash (whether you hit another vehicle or an object). Lenders/lessors typically require collision coverage so the vehicle can be repaired or replaced if it’s damaged in an accident. This coverage applies even if you were at fault in the collision.
Comprehensive coverage
Covers damage to your car from non-collision events. For example, theft, vandalism, fire, or natural disasters. Like collision, comprehensive coverage is usually mandatory for financed or leased cars. It protects the vehicle’s value against things like hailstorms or a stolen car, which a basic liability policy would not cover.
Do financed and leased cars have different insurance requirements? Generally, both require full coverage, but there are some nuances. Leasing companies are often stricter – they almost always require collision/comprehensive and often stipulate higher liability limits (as noted, e.g. 100/300/50) than the state minimum. They may also cap how high your deductible can be (for example, requiring a deductible of $500 or less) to ensure you can afford to fix the car if there’s a claim. Auto lenders (for financed purchases) also require collision and comprehensive, but they might be a bit more flexible on liability limits (sometimes accepting state minimum limits, though more coverage is always recommended). In either case, “state minimum” insurance alone is not enough when you have a lien or lease on the vehicle. For instance, Pennsylvania law only requires 15/30/5 in liability coverage on an owned car, but a leasing company will require much more coverage than that.
Lastly, keep in mind that required insurance is usually spelled out in your lease or loan agreement. Always review those terms. If your state law mandates additional coverages (like uninsured motorist or personal injury protection), you must carry those as well, regardless of leasing or financing. Lenders may even ask for proof of those coverages if they are legally required in your state.
What Is Gap Insurance, and Is It Required for a Lease or Loan?
Beyond standard coverages, gap insurance is another important piece for leased and financed cars. Gap insurance (Guaranteed Asset Protection) covers the “gap” between what your car is worth and what you owe on it if the car is totaled or stolen. New vehicles depreciate quickly, so in the event of a total loss, you could end up with an insurance payout that’s lower than your remaining loan or lease balance. Gap insurance steps in to pay off that difference so you’re not stuck paying a loan on a car you no longer have.
Many leasing companies require gap coverage as part of the lease agreement. In fact, some leases automatically include gap insurance (or a waiver) in the contract – be sure to check if you’re already paying for it. If it’s not included, the lessor will likely insist you purchase gap insurance yourself. Auto loan lenders are a bit less uniform regarding gap: some auto lenders require it, especially if you made a small down payment, but it’s not as universally mandated for loans. Regardless, gap insurance is highly recommended for financed cars whenever you owe more than the car’s current value.
There are a couple of ways to get gap coverage. Car insurance companies often offer gap insurance (or similar “loan/lease payoff” coverage) as an add-on to your full coverage policy for an extra premium. For example, one insurer’s loan/lease payoff might cover 25% above your car’s cash value to take care of a loan balance. Alternatively, dealerships and leasing companies may sell you a gap insurance policy at the time of purchase/lease. Just keep in mind that dealer-provided gap insurance tends to be more expensive than adding it to your regular insurance policy. It’s wise to compare costs.
Is gap insurance absolutely required? By law, no state requires gap insurance on auto policies. It’s purely a product of lease/loan contract requirements and smart financial protection. Nearly all leasing contracts do require it, while loans may only recommend it. If it’s optional in your case, consider your car’s depreciation: if you put little or no money down or your vehicle depreciates rapidly, gap insurance can save you thousands of dollars of out-of-pocket expense in a worst-case scenario. On the other hand, if you’re well ahead on your loan or the car is worth more than you owe, you might not need it. Evaluate your own “gap” periodically as your loan balance drops.
How Do You Show Proof of Insurance for a Financed or Leased Vehicle?
When you finance or lease a vehicle, providing proof of insurance is essential, both at the beginning and throughout the term. Here’s how the process usually works:
Obtain the required coverage before taking delivery of the car
As soon as you know the vehicle you’ll be leasing or financing, contact your insurance provider to set up a policy that meets the lender’s requirements. You will need to purchase at least the minimum liability, collision, and comprehensive coverages (and any other specified coverages) for the new car before you can drive it off the lot. Often, the dealer or lender will ask to see proof of this full coverage insurance as part of the paperwork.
Add the lender or lessor as a “loss payee” or interested party on your policy
When arranging coverage, you should inform your insurer about the financing or leasing company. The insurer will list the bank or leasing company on your policy as an additional interested party. This way, the lender is notified if the policy is canceled or lapses, and they are also entitled to be paid first by the insurance company if the car is totaled. Having the lender listed is usually a requirement in the loan/lease contract.
Show an insurance ID card or binder as proof
Your insurance company can provide an insurance ID card, declarations page, or binder that clearly shows the vehicle is insured and includes the coverages and limits. Typically, the dealership or financing office will require this document before you finalize the sale or lease. They might ask for a copy to keep on file. At a minimum, you’ll need to provide the policy number and your insurer’s details so the lender can verify coverage. Many dealers will even call your insurance agent on the spot to confirm the policy.
Maintain continuous coverage and update proof if needed
Importantly, you must keep the insurance active for the life of the loan or lease. If your policy renews every six or twelve months, be sure to pay your premiums on time so it doesn’t lapse. The lender or lessor will typically be automatically notified by your insurer if coverage is canceled. If you ever switch insurance companies or adjust coverages, inform your lender and provide updated proof. Sometimes lenders conduct periodic insurance audits – if they contact you for verification, respond promptly with the requested proof of insurance.
Avoid lapses or face “force-placed” insurance
Never let your coverage lapse on a financed/leased car. Driving without insurance is illegal, but even beyond that, your lender can take action if you fail to maintain required coverage. Usually, the loan agreement says that if you don’t insure the car, the lender has the right to purchase an insurance policy for it and bill you for the cost. This is called force-placed insurance, and it’s typically far more expensive than a policy you’d buy on your own. Force-placed policies also might protect the car (the lender’s interest) but not provide any liability coverage for you as the driver – a bad deal all around.
Quick tip: Once your car is paid off or your lease ends, you should notify your insurer to remove the lender’s name from your policy. At that point, you’re free to adjust your coverages (for example, you may choose to drop collision or comprehensive on an older car to save money). But until then, full coverage is mandatory and the finance company will be on your policy as a lienholder. If you have any questions about the proof of insurance process, our team at Insure on the Spot can help walk you through it – just give us a call at 773-202-5060.
Is Insurance More Expensive for Leased or Financed Cars?
Insurance companies base your rate on factors like your driving record, location, vehicle model, coverage selections, etc., not on whether the car is financed. However, because leased and financed cars require more coverage (and often higher coverage limits) than a paid-off car, you will likely pay more compared to someone insuring an equivalent car with only minimal coverage. In other words, it’s the broader insurance coverage that costs more, not the financing status itself.
For example, imagine Driver A owns their car outright and only carries the state’s minimum liability insurance. Driver B leases a similar car and must carry liability plus collision and comprehensive with low deductibles. Driver B’s insurance bill will be higher because full coverage costs more than a bare-bones policy. Likewise, a leasing company’s requirement of 100/300/50 liability limits will cost more than a policy with low 25/50/20 limits. Additionally, new cars (which are often leased) can be pricier to insure than older cars due to higher replacement values. All these factors contribute to higher premiums for many leased or financed vehicle policies.
There’s also the factor of gap insurance or other add-ons. If you choose to buy gap coverage, that’s an extra cost (though usually a small add-on to the premium). Some lessors might fold the cost of gap insurance into your lease payments, which indirectly increases the overall cost of insuring the car. And remember, some leases might dictate a maximum deductible (say $500). A lower deductible means a higher premium (since the insurer would pay more in a claim). So if you’d normally opt for a $1,000 deductible to save money, the lease could prevent that choice, keeping your premium higher.
Tips to Save on Insurance for a Leased or Financed Vehicle
While meeting your lender’s requirements can raise the cost, there are still plenty of ways to save money on your car insurance without compromising required coverages:
Shop Around for the Best Rates
Insurance premiums can vary widely between companies. It’s wise to compare quotes from multiple insurers, especially for full coverage policies. Look for insurers that offer special discounts for bundling policies, safe driving, or even for things like being a homeowner or good student. Many companies (including Insure on the Spot) provide discounts that can significantly offset the cost of the added coverage. Don’t be afraid to switch if another insurer offers the same coverage at a better price.
Consider Higher Deductibles (If Allowed)
Check your lease/loan terms for any deductible limit. If your lender allows a higher deductible, choosing (for example) a $1,000 deductible instead of $250 can lower your collision and comprehensive premiums. Just be sure you could afford that out-of-pocket amount if an accident happens. Note: If your leasing company requires a maximum $500 deductible, stick to that, but then focus on other savings methods.
Bundle Insurance Policies
If you have other insurance needs (like homeowners or renters insurance), bundling them with the same insurer often earns you a multi-policy discount. Combining your auto policy for the leased/financed car with another policy could save you a substantial percentage on both. Similarly, insuring multiple vehicles on one policy can qualify for multi-car discounts.
Maintain a Clean Driving Record and Good Credit
Safe driving will help keep your insurance costs down – accidents and tickets can lead to surcharges that make insuring any car more expensive. Also, in many states, insurance companies use credit-based insurance scores as a rating factor. Keeping a good credit score can help you secure a lower rate on your policy. While this isn’t specific to leased or financed cars, it’s extra important because full coverage is at stake (and a good rate on full coverage will save you more absolute dollars).
Ask About Available Discounts
Besides bundling, most insurers offer a menu of discounts. For instance, you might save by enrolling in an automatic payment plan or by taking a defensive driving course. Some companies have special programs for low-mileage drivers or for cars equipped with advanced safety features. When you’re carrying the higher coverage limits required for a loan/lease, each discount can make a difference. Don’t hesitate to ask your agent which discounts you might qualify for – even things like being claim-free or paperless can help reduce the premium.
By using these strategies, you can often counteract the added cost of required coverages. The goal is to meet your lease/loan obligations without breaking the bank on insurance. If you need help exploring affordable insurance options for your financed or leased car, Insure on the Spot can help you compare quotes and find savings – reach out for a free quote anytime.
Frequently Asked Questions about Insuring Leased and Financed Cars
Q: Do I need full coverage on a financed car?
A: Yes. If your car is financed through a loan (or leased), your lender will require you to carry full coverage auto insurance. “Full coverage” generally means having liability insurance plus collision and comprehensive coverage on the vehicle. This is to protect the lender’s interest in the car – if the car is wrecked or stolen, insurance will pay for the loss. You typically must maintain this coverage until the loan is paid off. Driving a financed car with liability-only insurance would violate most loan agreements (and the lender could take action such as buying insurance on your behalf and charging you for it). Once you finish paying off the car, full coverage becomes optional – but while it’s financed, it’s mandatory.
Q: Is car insurance included in a car lease?
A: Not usually. Auto insurance is almost never included as part of a lease agreement. When you lease a car, you are responsible for obtaining your own insurance policy to meet the leasing company’s requirements. The monthly lease payment you negotiate with the dealership does not cover insurance – that cost is separate and up to you. (A few luxury or special lease deals might bundle insurance, but this is very rare and would be explicitly stated in the contract.) So before you drive off in a leased vehicle, you must purchase the required insurance on your own. Dealers will verify you have an active policy in place; they won’t hand over the keys until you show proof of insurance.
Q: Who is responsible for insurance on a leased car?
A: The lessee (you, the person leasing the car) is responsible for carrying insurance, not the leasing company. The leasing company owns the vehicle, but they require you to buy and maintain an insurance policy naming them as an insured interest. You’ll pay the premiums and handle any claims just as if you owned the car. The lease contract will outline the coverages you need to have. If you fail to keep the car insured to those specifications, the lessor can enforce penalties or even repossess the vehicle.
Q: Is gap insurance required for a leased or financed vehicle?
A: Gap insurance is often required for leased cars, and strongly recommended for financed ones. Most leasing companies include or insist on gap coverage because new cars depreciate quickly, and they don’t want you owing a big balance after an insurance payout on a total loss. For financed cars, gap insurance might be optional (some lenders require it, many just recommend it). Even if not required, if you owe more on your loan than the car’s value – a common situation in the early years of a car loan – then gap insurance is a smart safeguard. It will pay off the remaining loan/lease if your car is declared a total loss and your standard insurance doesn’t cover the whole balance. Check your lease or loan paperwork to see if gap coverage is already included. If not, you can buy it through your auto insurer or from the dealership. It’s a relatively inexpensive add-on for the peace of mind it provides.
Q: Does financing or leasing a car make insurance cost more?
A: Not automatically, but the required coverages do. There’s no surcharge on your policy just for having a car loan or lease – insurers base your rate on other factors (driving history, vehicle type, location, etc.). However, when you finance or lease, you’ll be carrying collision and comprehensive coverage (often with lower deductibles) and higher liability limits than someone who owns an older car outright might choose to carry. Those coverages add cost. However, many drivers find the extra cost is worthwhile (or unavoidable) for the protection and because it’s required by the contract.
Q: What happens if I don’t maintain insurance on my financed car?
A: Failing to keep insurance on a financed or leased car can lead to serious consequences. First, driving without at least your state’s minimum liability insurance is illegal – you could face fines, license suspension, and other penalties. Second, and specific to your loan/lease, the lender will be notified if your insurance is canceled or lapses (since they’re listed on your policy). At that point, the lender can invoke the insurance clause of your agreement. Typically, they will purchase an insurance policy on the vehicle and bill you for it. This is force-placed insurance, and it’s notoriously expensive (and might offer limited coverage). You’ll have to pay that cost on top of your car payments. If you don’t reimburse them, those charges can go to collections and damage your credit, or the lender could even repossess the car for breaching the contract.
Leasing or financing a vehicle comes with added insurance responsibilities, but with the right guidance, it’s not as daunting as it might seem. Make sure you understand your coverage requirements and take advantage of ways to save on your premiums. If you have questions or need affordable coverage for your leased or financed car, contact Insure on the Spot for a free, no-obligation quote. We’ll help you meet all requirements and keep you protected – all at a budget-friendly rate. Call 773-202-5060 today to get started.