Do You Need Gap Insurance for a Leased Car?
Gap insurance may be a requirement of your lease, but even if it’s not, it’s good to have if you’re leasing a vehicle. Read more about gap insurance here.
Written by Brittni Brinn
Reviewed by Pat Roache
Depending on your lease, you may be required to carry gap insurance to cover any outstanding payments if your leased vehicle is deemed a total loss. Even if it’s not a condition of your lease, purchasing gap insurance is generally a smart idea, especially if your leased vehicle is new or in the luxury category.
As the car market recovers from parts shortages and distribution difficulties over the past few years, a
car lease
is still a viable option. Leasing a vehicle can provide a lot of benefits for drivers looking for lower monthly car payments and the chance to drive the most modern offerings for less. But do you need to have
gap insurance
on a leased vehicle? Here’s a detailed overview of what gap insurance does, if it’s worth adding to your insurance policy, and where you can find it.Do you need gap insurance for a leased car?
If it is not a requirement of your lease agreement, you technically don’t need to carry gap insurance for a leased car. However, it’s an ideal coverage option, as it can save you from having to pay out of pocket beyond what your primary insurance policy will cover if your lease is subject to theft or considerable damage.
If you have a choice whether or not you want to add gap insurance to your policy, consider the actual cash value of your leased vehicle. If you owe more on your lease than the car is worth, gap insurance can cover the difference in the case of an accident.
It’s also a good idea to add gap insurance to your insurance plan if you lease a brand-new car. Because depreciation will just be starting, the value of the vehicle will still be quite high and will cost a pretty penny to replace if something happens to it.
The length of your lease also comes into play—a longer lease term can mean more risk of getting into an accident, and more costs on top of the outstanding amount owed on your lease if you don’t have gap insurance. A low down payment lease is another situation where gap insurance is beneficial.
To sum up, here are the main reasons to get gap insurance coverage:
- The lease balance is higher than the car’s actual value
- You use your car more than the average driver
- The lease is longer than 48 months
- The model depreciates faster than average
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What is gap insurance?
GAP (Guaranteed Asset Protection) insurance is a policy option that will cover the difference between the amount still owed on your lease and the payout you receive from your insurer if the lease is a total loss due to an accident or theft.
This difference may be quite substantial, as your insurance payout will reflect the car’s value at the time of the loss, not the value when you leased it. This means that there will still be money owing on your lease that your main insurance will not be enough to cover. Gap insurance fills that gap so you won’t have to pay out of pocket for the remaining finance on your lease.
Let’s look at an example: say your leased car has a current cash value of $15,000 and you still owe $16,000 on your lease. If the leased car is wrecked in an accident and declared a total loss, your full coverage insurance should payout $15,000 to cover the vehicle. Your gap insurance will then kick in to cover the additional $1,000 to pay off your lease.
Here’s what’s generally included in gap insurance coverage:
- Settlement of outstanding lease coverage
- Prevent additional fees and penalties from the lease provider
- Flexible payment options
- Coverage for the duration of the lease agreement
- Coverage for drivers named on your full coverage insurance
Now that you have an idea of what gap insurance is and how it works, here are some things that are not covered by a gap insurance policy:
- Payouts for vehicles written off due to a DUI/DWI
- If a leased vehicle is declared a total loss due to illegal activities or negligence
- If the leased vehicle was stolen by someone who had access to its keys
- Fitted extras or accessories added to the leased vehicle
- Missed payments
- Repossession
- Penalties for excessive mileage
Other coverages can also serve you well if you’re leasing a vehicle. For example, lease/loan insurance can also help cover the difference in the car’s value and the amount left on your lease, but this coverage usually has a limit for the amount that can be paid out. In most cases, gap insurance is the easiest and most useful coverage for a leased vehicle.
How gap insurance works on a leased vehicle
When you sign the lease agreement, you’ll also agree to the insurance requirements outlined by your lessor (lease provider). In cases where the lessor does not provide or require gap insurance, you can still add it to your insurance. You'll need to have
full coverage car insurance
(including collision coverage
and comprehensive coverage
) on your policy before you can add gap insurance. Gap insurance will step in if your car is declared a total loss due to a car accident, theft, or other similar incidents. There are two main types of gap insurance policies:
- Finance/Contract hire: This basic plan covers the amount still owing on your lease after your full coverage insurance has been paid out.
- Vehicle replacement: In addition to paying the amount still owing on your lease, this coverage also provides a replacement vehicle as close to the written-off model as possible.
Because the monthly payments on a lease are generally lower than on a
car loan
, the gap between the car’s actual cash value and the outstanding finance on the lease is wider. Gap insurance will make sure that you won’t be stuck paying thousands of dollars for a car you can no longer use after an accident.If you decide to return or trade in your lease before the end of your lease term, you may be eligible for a
gap insurance refund
—but it will depend on your insurance company.Compare insurance quotes from 50+ insurance companies with Jerry in under 45 seconds
Compare insurance quotes from 50+ insurance companies with Jerry in under 45 seconds
4.7/5 rating on the App Store | Trusted by 5+ million customers and 7 million cars4.7/5 app rating | Trusted by 5M+ driversHow much does gap insurance cost?
As with all insurance policies, the exact amount you pay for gap insurance will depend on your driving history, age, location, and more. However, gap insurance is generally inexpensive.
According to the Insurance Information Institute (III), it can cost as little as $20 a year to add gap insurance to your current insurance plan. You can also estimate how much gap insurance will cost by taking your current premium and calculating five to six percent of its value—so, for a $1,000 premium, you may pay around $50 or $60 a year for gap insurance. The actual amount you pay will depend on your provider and how they calculate your rates.
Your lease provider may offer gap insurance through your lease agreement, but this will typically be a flat amount, usually around $500 to $700. It’s a good idea to check with your insurance company before signing off on your lease to figure out the best and most cost-effective way to purchase gap insurance.
Is it worth getting gap coverage for a car lease?
Overall, gap insurance is a useful policy that won’t cost you much in the long run. If you are leasing a new vehicle, a luxury vehicle, or you have a long or daily commute, purchasing a gap insurance policy is worth it. And in most cases, you’ll only need to have it in place for a short time.
Remember, gap insurance will only kick in if there is still a difference between the actual cash value of your car and the amount remaining on the lease. Once the money you owe on your lease is equal to or lower than the actual cash value of your car, your full coverage insurance will be enough to cover your damages.
Here are some more instances when you can pass on gap coverage:
- If you havenew car replacement insurance
- You are leasing a used or older car
- You don’t mind covering the money owing on your lease out of pocket
How to buy gap insurance
There are a few options when it comes to buying gap insurance.
Your lender or dealership may offer gap insurance as part of your lease agreement. It will generally cost a flat amount upfront, though you can sometimes split the cost into monthly payments. In some cases, lessors are required to offer gap insurance by law.
Even if purchasing gap insurance from your lease provider may be convenient, it may not be the most cost-effective option. That’s why it’s important to compare your options before signing off on your lease.
The best place to look for better rates is with your current auto insurance company. It may cost only a few extra dollars a month to add gap insurance coverage to your existing car insurance policy. Since you’ll have to update your car insurance for your newly-leased vehicle, purchasing gap insurance from your current provider is an easy option.
You can also shop around for other insurance providers. Some insurers to start with are
MetLife
, Progressive
, and Safeco
. But there may be other—and better—gap insurance rates out there—you can browse online or use the Jerry
app to help speed up your search!Another option is to get your gap insurance through your bank or a credit union. You may find cheaper and more flexible options!
“I just financed a new car and knew my insurance premium was going to rise.Jerrywas well worth it to use. They helped me find a lower premium and canceled my old policy instantly when I was ready to switch!” —Meghana D.
MORE: How to refinance your car lease
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FAQs
Is loan lease coverage the same as gap insurance coverage?
Both loan/lease coverage and gap insurance coverage are activated if your leased vehicle is declared a total loss. However, loan/lease coverage will only cover up to 25% of the car’s actual cash value minus the deductible. Gap coverage may have a limit (for example $30,000), but it’s more likely to cover the full cost of the remaining lease balance.
What does gap insurance cover?
Gap insurance will cover the difference between the car’s current value and the outstanding amount left on your lease. This coverage will apply if your leased vehicle is totaled in a car accident, stolen, or deemed a total loss.
