Do I need insurance to lease a car? (Must-Read Requirements)

Leased car insurance coverage must meet state minimums and your contract. Typical leased car insurance requirements include collision, comprehensive, and 100/300/50 of liability coverage.

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Zaneta Wood, Ed.S. has over 15 years of experience in research and technical writing bringing a keen understanding of data analysis and information synthesis to reach a wide variety of audiences. She studied adult education and instructional technology at Appalachian State...

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Reviewed byJoel Ohman
Founder, CFP®

UPDATED: Jun 5, 2020

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Here's what you need to know...

  • When you lease a car, you are legally responsible for it
  • You will be required to carry an adequate amount of personal car insurance on your leased car
  • You will be considered a co-owner of the car to the Department of Motor Vehicles

Leasing a car can be very confusing if you are used to buying, and you will need to make sure you have adequate car insurance coverage. You will sign a contractual agreement that says that you take responsibility for the car while it is in your possession, but at the end of the day, the leasing company owns the vehicle and you are simply paying for a portion of its value to use it.

If you are the type of consumer who prefers to have a new vehicle every few years, leasing may actually save you money and a hassle in the process.

When you are leasing a car, you are under contract for 1 to 5 years. Because you are not buying the car and you will not be earning equity, your payments for a leased car will be significantly lower than the payments for a financed car.

The payment will be the difference between the current value of the car and the expected value of the car at the time the contract ends. You may also be expected to pay a small leasing agent fee.

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Standard Car Insurance Requirements for Leased Cars

You will be required to carry an adequate amount of personal car insurance on your leased car because it’s required that all vehicles must be insured in the state where it is registered.

State car insurance requirements are very strict and they are not avoidable.

As long as the car is registered to be driven, it needs to have at least liability insurance, and it is the registered vehicle owner’s responsibility to buy the coverage.

Just because you are not the titleholder does not mean that the car is not registered in your name.

When you lease a car, the car will be registered to both the leasing agency and the contract holder.

You will be considered a co-owner of the car to the Department of Motor Vehicles. This is because you are responsible for damages that happen while you are driving and for fees accrued from tickets.

The leasing company is listed because they have an interest in the car.

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State-mandated Car Insurance Requirements

Every state has their own unique car insurance laws. Some require car insurance explicitly, and some will require insurance or another most expensive alternative.

Almost all individuals who comply with insurance laws will do so by purchasing a personal auto insurance plan from a carrier in their state.

If you fail to purchase auto insurance as the registered owner of a car, you could face some very damaging consequences and penalties.

The requirements for insurance will depend upon the state that you live in.

A majority of states will require at least some level of liability coverage that will pay for a minimal amount of third-party damages.

Other states, especially those in no-fault states, will require additional coverage to pay for your medical expenses.

Common coverage requirements include:

  • Bodily Injury Liability
  • Property Damage Liability
  • Medical Payments or Personal Injury Protection
  • Uninsured Motorist Protection

While state minimums satisfy the law and help you avoid a misdemeanor, they do not really provide you with the proper level of protection.

They are designed to act as a bare minimum and not adequate cover. Lessors understand this and this is why you are required to carry much more than the state minimums when you are leasing.

Requirements As Written in your Lease Contract

You should review your lease contract closely before signing it. Once you skim past the details on the payment, the charges, the amount due at signing and the termination statement, you will need to review the insurance requirements closely.

The requirements are extremely strict and are not negotiable.

Liability Requirements

If you enter into a finance contract, the contract has no specific requirements concerning your liability coverage. A lessor, however, has more interest in the car as a registered co-owner.

This is why you are required to carry a higher level of liability coverage than the state would require.

Liability consists of Bodily Injury and Property Damage cover. When these terms are written, they are written on a per person and per accident basis.

The lessor will require that you have no less than $100,000 per person, $300,000 per occurrence in Bodily Injury.

The Property Damage requirements are typically $50,000, but they could go up to $100,000 with some leasing agencies.

Physical Damage Requirements

You must carry physical damage coverage that will protect the actual vehicle in the event of a loss.

You will need both comprehensive and collision and the coverage will be force-placed if the company discovers you do not carry it.

One thing you need to know is that you cannot automatically take the highest deductible offered.

The company wants to be sure you can pay for your deductible so the highest option is $500.

Gap Insurance

You typically have an option to buy gap insurance, but it is required when leasing. Gap insurance will pay for the difference between the car’s worth and how much it is under contract for.

This will help you avoid expensive bills when the car is totaled.

The lessor may protect vehicles under a blanket policy, but the contract says a car specific plan is your responsibility. Be sure to compare the cost of insurance from different providers.

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If you lease a car, does it come with insurance?

  • You are required to carry car insurance on a leased vehicle
  • The types and amounts of insurance will depend on the requirements of your state and your leasing contract
  • In general, you will need liability, comprehensive and collision coverage to meet the requirements of both
  • Gap insurance is usually also required though many times it is rolled into your lease payments

While buying and leasing are both ways to have access to a vehicle, there are many differences between them. For people who are not familiar with either process, the ins and outs of buying and leasing can be confusing, especially insurance requirements.

If you are considering leasing a vehicle, you might be wondering if insurance is included in your lease.

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Leasing versus Buying a Vehicle

There are many differences between buying and leasing a vehicle. People in the market for a new vehicle will need to do their research and evaluate their tastes and lifestyles to find out which option is best for them.

The benefits of leasing a car include:

  • Smaller down payment requirement
  • Smaller monthly lease payments
  • Driving a better car for less money
  • Decreased repair costs compared to buying, as a factory warranty usually covers most repairs during a 3-year lease period
  • The ability to drive a brand new car every two or three years
  • No need to hassle with trading in your old car to get a new one
  • You only pay the sales tax on the amount of the car that you finance

The drawbacks of leasing a car include:

  • When the lease has expired, you do not own the vehicle
  • You are required to stay within a set mileage limit or pay overage fees
  • Lease contracts can be overwhelming and confusing
  • In the long run, leasing a vehicle can be more expensive than buying
  • You may have to pay for wear-and-tear on the vehicle which will be due upon termination of your lease
  • If you need to terminate your lease early, it can be costly

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Car Insurance When Leasing

According to the Insurance Information Institute, when leasing a vehicle, you are still required to purchase your own insurance coverage for it.

The bank or dealership that is leasing you the vehicle will mandate that you purchase and provide continuous collision and comprehensive coverage.

This is because your leased vehicle is still technically owned by the bank, dealership, or leasing company.

They want to protect their asset in the event that some type of accident or unforeseen event destroys, damages, or causes the car to be lost.

Additionally, you will need to carry coverage that is required by your state, such as liability insurance.

Liability insurance protects you as the driver and also protects the leasing company from being responsible, should they be named as an at-fault party to any accident.

The appropriate amounts of insurance coverage will protect both you and your leasing company from financial ruin, should a catastrophe occur with the leased vehicle.

Shopping online and comparing prices of different companies and insurance policies can help you make the best decision regarding coverage on your leased or purchased vehicle.

  • Collision coverage  pays for damage to your leased vehicle when an accident occurs with another vehicle or object
  • Comprehensive coverage – pays for losses that are a result of something other than the leased car colliding with another object or automobile

What is Gap Insurance?

Even if you have the coverage required by your state laws and collision and comprehensive coverage required by your lease agreement, the bank or dealership may also require you to purchase what is called gap insurance.

This type of insurance covers the “gap” in the event that your car is totaled and there is a difference between the amount your car insurance pays you for it and the amount that is owed on your lease.

This can happen because the amount your insurance company pays you for a totaled vehicle is based on its actual cash value, not the amount that is still owed on a lease or a car loan.

Gap insurance is different than other insurance coverage on a leased car, because it is usually rolled up into the lease payments, so no extra payments or additional companies need to be paid.

In most cases, the dealer or bank that leases the vehicle out will purchase a master policy from a large insurance company. This policy covers the gap insurance for all of the vehicles that they lease out.

The bank or dealership will then charge you for a gap waiver with your lease agreement.

If you will be leasing a vehicle, you should check with your leasing company or on the contract to find out if you are responsible for obtaining gap insurance or if it is rolled into your lease payments.

Even people who are purchasing a vehicle might want to look into obtaining a gap policy.

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Commonly Required Leasing Coverage Amounts

When purchasing an auto insurance policy for a leased vehicle, you should be certain you are meeting the minimum requirements for both the state and your leasing contract.

Some contracts require as little as $20,000 per person and $40,000 per occurrence liability insurance, $5,000 property liability coverage, comprehensive and collision coverage for the actual value of the leased vehicle with a maximum $1,000 deductible.

However, other leasing companies may require as much as $150,000 per person and $300,000 for each occurrence, as well as $50,000 for liability coverage.

No matter what your leasing company requires from you as far as insurance coverage, comparison shopping can help you get the best policy for your needs at competitive rates.

If you are to get into an accident in your leased vehicle, regardless of who is at fault, the best way to protect yourself and your assets is to have appropriate insurance coverage.

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Car Insurance: Leasing Vs. Buying

  • The two most popular options when it comes to vehicles are leasing and buying
  • Loan payments are often higher with buying a car than with leasing one
  • Excessive wear and tear and mileage are not as much of a concern when buying a car

When you want to get a car, there are two financing options to explore:

  • you can choose to lease the vehicle
  • you can purchase the vehicle

There are some major differences between these two options, so you will need to take a close look at the pros and cons of each financing method.

Many new car dealerships provide the opportunity to lease a car. Essentially, it is like renting the car as you will not own it at the end of the lease term. Dealerships provide options to lease for 12 months all the way to 48 months and past.

Often, it allows you to get more vehicle for less money, which is why many people choose to lease.

Buying a car is another option. You might choose to buy new or used. In terms of financing, you can choose how much your payments will be based on how many months you will spread the payments over as well as how much you’re willing to put down in cash.

However you decide to purchase a vehicle, you will need insurance coverage. Compare quotes by entering your zip code into our tool above to find the best deal on the coverage you desire.

Pros of Leasing a Car

There are a lot of pros to leasing a car, which enables you to get the car you want without actually owning it.

You Get More Car for Less

People often lease because of being able to get more car for less money. You’re only paying for the depreciation of the vehicle as opposed to the entire value. Even once you add in the cost of taxes, registration, and other fees, it is often less than the cost of financing a new car.

With a lower payment, you have the option to get more features in the car.

You could explore a higher trim level on the make and model you are interested in without spending any more on the monthly payments.

You might also get more safety features, which helps to keep you safe on the roads.

The Future Value Has No Impact on You

The future value of the car has absolutely no impact on you. Many people say that a car depreciates the moment you drive it off the lot.

If it does, it doesn’t matter to you. You’re only making payments on the car for the set terms of the lease. Once your lease is over, you bring the car back to the dealership and owe nothing.

The Upfront Cost is Minimal

The upfront cost for you to drive the car off the dealership lot is minimal. You might make the first month’s payment and possibly a small down payment.

The money that you pay to the dealership up front is more of a “good faith” payment than anything else. With financing a car, you could be looking at putting several thousand dollars down, and this might not be money that you have available.

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Cons of Leasing a Car

The cons of leasing a car should be thoroughly understood before you jump into a leasing agreement at a dealership.

Going Over in Mileage is Expensive

When you get a lease, you set the mileage upfront. Many leasing agreements will provide you with 10,000 miles a year. You might be able to get 12,000 or 15,000 miles, though it’s unlikely that you will find mileage caps that are higher than this.

The leasing agreement will identify what it will cost for every mile you go over once your lease is up. If you have a three-year lease term with a 12,000 per year mileage cap, you are allowed to have 36,000 miles on the odometer when you turn the lease in.

If you have 40,000 miles, you would be paying a certain amount for each of the 4,000 miles you went over.

Depending on the rate you’re charged, this can be a significant amount of money. Some dealerships will look the other way if you’re buying another car from them. However, many dealerships will require you to pay.

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Excess Wear and Tear is Your Responsibility

Your leasing agreement identifies what is considered normal wear and tear. Anything that is identified as “excessive” is your responsibility. You might have to pay for dings and scratches on the car body.

You might also have to pay if there is excessive wear and tear on any of the following:

  • tires
  • brakes
  • any of the mechanical features

The End of Your Lease Requires You to Start Over

At the end of the lease, you have no equity. You have essentially been making payments to rent the vehicle. You will have the choice to buy the car or turn it in and choose another vehicle at the dealership.

If you no longer have a need for a car, you can also choose to walk away entirely, though you won’t receive any money for turning in the lease like you would if you were to sell your car once it’s paid for.

Pros of Buying a Car

You will find that there are pros of buying a car, starting with the fact that you will own your car outright once you have made all of the payments.

Mileage and Wear and Tear Aren’t a Problem

When you finance a car, you are working towards owning it. Once the finance terms are up, the car is yours. The mileage and wear and tear aren’t going to count against you. If you want to put 40,000 miles on the car in the first year, that’s your prerogative.

The same goes for wear and tear, though it could ultimately impact the trade-in or resale value.

You Gain Equity

As you make payments, you gain equity in your car. The more payments you make, the more it will become yours.

Eventually, you will owe less and less on the car until you own it outright. Having equity is not something you will ever have in a lease.

Once the car is paid for, there is value in it. You can then choose to not make payments while having a car to drive or sell the car in order to make a profit.

You Can Choose to Customize Your Car

When you own your car, you can make all of the modifications that you desire. Whether it’s a sound system, window tint, a custom paint job or something else, it’s your car.

You can customize your car however you want without having to worry about giving it back to the dealership in a sellable condition.

Cons of Buying a Car

Plenty of cons for buying a car exist, too. Familiarize yourself with them so you can determine if it’s still in your best interest to buy versus lease.

Upfront Costs are Higher

The upfront costs are often higher when you buy a car. Many finance companies require you to put 10 to 20 percent of the car’s value down as a down payment.

The monthly payments are also going to be higher because you’re purchasing the entire vehicle instead of simply leasing it for a short period of time.

There is often a balance between what you can afford for a down payment and what you can afford as a monthly payment. The more you put down, the more affordable your monthly payment will be.

Insurance is Higher

In addition to what the state requires for car insurance, you also have to look at what the lien holder requires.

If you choose to finance your car when you buy it, you have to meet the requirements of the lien holder until the loan is paid off, and the title is transferred to your name.

The lien holder might require you to have collision and comprehensive coverage, which is common. These requirements also add more financial protection to your policy.

If you get into an accident that is your fault, you would have the coverage to make the repairs to your car. Plus, you have the coverage for non-collision related accidents, such as a rock hitting your windshield or hitting a deer on the road.

Increasing coverage will increase your premiums.

However, you can often control how much it increases by determining the coverage levels and by getting quotes from several car insurance companies.

Once you get the policy, you then need to send proof of insurance to the lien holder so they know that you have satisfied the insurance requirements.

There Might be Negative Equity

If there is a difference between what you owe and what your car is worth, it’s called negative equity. It’s common to have a lot of negative equity in your car loan if you rolled over the remnants of an old loan when you purchased your new car.

If you don’t pay off your car in full before trading it in to get a new one, you will have to roll over the balance. If you don’t think you’re going to keep your car until the car is paid off, it might be a good idea to explore a lease instead.

There are plenty of ways to overcome negative equity, though it might take longer than desired.

  • Pay the loan off in its entirety.
  • Keep loan terms as short as possible while still being able to afford the monthly payments.

The financing option for everyone is different based on what they can afford and what they are looking for.

When you decide you want to get a car, you need to weigh the pros and cons of leasing and financing. It will make it easier for you to make a decision that works for you and your budget.

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Do you have to pay insurance if you lease a car?

  • When you lease a vehicle, you’re paying to use it and the leasing company is the vehicle owner
  • While state law says that vehicle owners must maintain insurance, when a lease contract is signed you’re agreeing that you’ll purchase insurance on the vehicle in your name
  • Parties who are leasing must carry higher liability limits than what’s required by law to satisfy the lease agreement
  • You must purchase a policy that includes physical damage coverage with acceptable deductibles to pay for damage to the leased car

When you’re entering into a lease contract, you’ll notice that some leasing companies will actually pay for certain costs associated with owning a vehicle.

It’s not out of the ordinary for a company to agree to pay for routine maintenance like oil and fluid changes in order to retain as much of the vehicle’s value as possible.

While every contract varies from company to company, virtually all contracts state that it’s your responsibility to pay for auto insurance. Not only must you buy insurance, you’re also responsible for buying the appropriate amount and type of coverage.

Read this guide to insuring leased vehicles and you’ll be all but ready to lease a car.

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Insuring Your Vehicle to Satisfy State Law

You might already know that a leased car is titled in the name of its owner. While the leaser is the one listed on the title, in most cases you as the lessee will be the registered owner when you apply for plates.

This happens when the leasing company has the lessee sign a Power of Attorney to register the vehicle in the United States.

Once the Power of Attorney form is signed and the vehicle is registered, the lessee and primary driver are responsible for meeting the auto insurance requirements that are set by state officials.

It also says in the fine print of the lease contract that it’s the lessee’s responsibility to maintain liability coverage to protect their finances and also to protect the lessor.

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What are insurance requirements in the state?

Insurance requirements vary from state to state. In most states, strictly third-party liability insurance is required. This type of coverage will pay for the bodily injury and the property damage that is caused by the insured person and other listed or permissive drivers.

The actual limits that are required cross-country are fairly low, but some states have pushed for higher limits than others.

It is also possible that you might be required to carry personal injury protection and uninsured motorist coverage that will pay for your own medical bills.

Whatever the state insurance requirements are, it’s your job to be sure that you comply with them. Failing to comply with these mandated laws could result in court dates in both civil and criminal court.

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Is minimum coverage enough when you’re leasing?

State officials set the rules that all residents in the state must comply with. You’ll be responsible for abiding by these rules and also fulfilling your obligations as a lessee when you’re leasing a car.

Under a lease contract, you’re required to buy higher limits of third-party liability coverage than what’s required by the state.

Under most contracts, you can carry no less than:

  • Bodily Injury – $150,000 per person and up to $300,000 per accident
  • Property Damage – $50,000 per accident

Why are leasing liability requirements higher?

It’s easy to question why you’d need higher limits of liability than the average person in the state when you’re driving a car that belongs to a leasing company and not yourself. This is actually the prime reason why you’re expected to purchase more coverage.

While someone who’s injured in a loss would first file a claim or suit against the driver of the car, it’s also possible that they could come after the leasing company.

By requiring the driver to carry higher than normal limits, it provides the lessor with a larger buffer of protection in the event of a big accident that results in a large lawsuit.

Requirements for Insuring the Leased Vehicle

You might be comfortable with requirements surrounding liability coverage, but the requirements on purchasing physical damage coverage are very different.

If the leased vehicle is damaged, the lessor could easily be out of thousands of dollars in residual values and in leasing fees as well.

This is why the company will pay very close attention to your coverage to ensure that your insurer will pay to repair the car or replace it when you’re entering into the contract.

How much physical damage coverage do you need?

All lessees must carry both comprehensive and collision coverage on the car under contract. Each of these will pay for damage to the vehicle for different causes.

Comprehensive pays for parked claims or claims that involve a collision with a live animal.

Collision pays for damage that is sustained while the vehicle is being driven.

Full coverage is a must and the deductible that you choose is important.

Since lessors don’t want you to have a deductible that you can’t afford to pay, many have written into their contract that you  can’t carry a deductible higher than $500.

Some may be a little more lenient and allow you to carry a $1000 deductible if you’re leasing a high-end luxury auto.

What does it mean when you have to list a loss payee on your insurance?

The only way that the lessor can verify you have coverage is by requiring you to list their company as a loss payee.

This means that the company will be notified when coverage changes or is canceled.

It also means that the insured will have to get claims check signed off by the loss payee so that they’re aware the vehicle was involved in a loss and that the vehicle is being repaired.

Is gap insurance a requirement on leased cars?

The very last insurance-related requirement you might run into is gap insurance. This is only required if it’s not already included in your lease contract.

It protects the lessor by paying for the depreciation and also protects you as the lessee by paying for the remainder of your lease payments.

Check to see if it’s cheaper to add Guaranteed Asset Protection through your personal car insurer or through the company.

As you can see, when you lease a car it’s common for your insurance to cost more than it would if you were financing. With this being said, there are ways to keep your auto insurance costs low.

The most effective way to save is to shop around for auto insurance with an online comparison tool.

Enter your zip code in our FREE tool above to compare car insurance quotes now!



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