Don’t Get Gapped – Understanding Gap Insurance for Leased Cars

Leasing a new car can seem attractive – you can drive a nicer vehicle while avoiding the rapid depreciation new cars face. But leases also come with financial risks, especially if your leased car gets totaled. Gap insurance can protect you from major out-of-pocket costs.

In this comprehensive guide, we’ll explain everything you need to know about gap insurance for leased cars, including:

• What is gap insurance and how does it work?
• Why gap coverage is especially important for leased vehicles
• What gap insurance typically covers and excludes
• How much does gap insurance cost on a lease?
• Is gap insurance worth it for a leased car?
• How to get the best gap insurance rate

Let’s get started!

What is Gap Insurance?

Gap insurance, also known as gap coverage, covers the difference between what your car insurance pays out if your vehicle is totaled and what you still owe on your lease or loan.

For example, say you have a leased vehicle valued at $20,000, but you owe $22,000 on the lease. If it gets totaled, your insurance company will only pay based on the current value, leaving you responsible for the $2,000 “gap.”

Gap coverage pays the difference so you don’t end up owing thousands out-of-pocket. It provides an extra layer of protection on top of your standard collision insurance.

Why Gap Coverage Matters for Leased Cars

Gap insurance is especially important when leasing a new vehicle for several reasons:

• Rapid depreciation – New cars depreciate quickly – they can lose 20% or more of their value in the first year alone. This creates a large gap between the car’s value and balance owed.

• No equity – With a lease, you have no equity in the vehicle as you make payments. The leasing company owns the vehicle.

• Higher residual value – Leases have higher residual values than auto loans, increasing the potential gap.

• Owing extra fees – Gaps may include additional costs like early termination fees.

Without gap coverage, you can end up owing thousands after a total loss, even with standard insurance. Gap protects you from this financial risk.

What Gap Insurance Typically Covers

If you experience a total loss on your leased vehicle, gap coverage will pay:

• The difference between the car’s depreciated value and the residual value you owe on the lease
• Any deductible you owed under your standard collision coverage
• Additional fees specified in your gap policy, such as early lease termination fees
• The remaining payments owed on your lease agreement

Coverage maximums vary by policy, but often match the value of the leased vehicle when first acquired. Make sure your limit adequately covers the vehicle’s original value.

Exclusions to Watch Out For

While gap insurance provides valuable protection, there are a few common exclusions to be aware of:

• Deductibles – Your standard auto insurance deductible may not be covered. Verify if your gap coverage pays this.

• Wear and tear – Gap insurance only applies if the loss is from an insured peril like an accident or theft. It won’t cover excess wear and use charges.

• Missed payments – You must be up-to-date on payments for gap coverage to apply.

• Lease mileage limits – Extra mileage fees may not be covered.

Reading your full gap insurance policy will ensure you understand exactly what it covers in the event of a total loss. Don’t assume everything will be paid.

How Much Does Gap Insurance Cost on a Lease?

Gap insurance costs vary substantially based on factors like:

• Your location
• Age and driving record
• Make, model, and value of the leased vehicle
• Length of the lease term
• Your selected coverage limits

However, on average, you can expect to pay $300 to $800 for a gap policy over the life of a 2-3 year lease. Monthly costs typically range from $10 to $30.

Getting quotes from multiple providers is the best way to find an affordable rate tailored to your situation.

Is Gap Insurance on a Lease Worth It?

Gap coverage provides valuable financial protection against owing thousands if your leased car gets totaled – for a relatively low cost.

In most cases, gap insurance is a smart investment:

• It’s typically required by leasing companies to protect their asset. Declining usually isn’t an option.

• The small monthly premiums are little compared to potentially owing $5,000+ without coverage.

• New and leased vehicles depreciate rapidly, creating significant gaps.

• You have no equity cushion in a leased vehicle.

Unless you have substantial savings to cover a large gap, gap coverage provides vital peace of mind. Make sure to get quotes so you don’t overpay.

How to Get the Best Gap Insurance Rate

Follow these tips to secure an affordable gap insurance policy for your leased vehicle:

• Shop around – Get quotes from your auto insurance provider, lease company, banks, and independent insurers. Rates can vary widely.

• Ask for discounts – See if you qualify for any multi-policy, safe driver, or security device discounts to reduce your premium.

• Raise deductibles – Accepting a higher deductible on your standard insurance policy can lower gap costs.

• Limit coverage – If your lease balance will be low near the end of the term, ask about declining gap coverage in the final 6 months.

• Mind the length – Longer lease terms mean paying more in total gap premiums so keep the length reasonable.

• Buy early – Purchasing gap coverage upfront rather than adding it later typically saves money overall.

Getting gap insurance for your leased vehicle provides vital financial protection. Follow the tips above to find the most cost-effective policy for your situation.

Key Takeaways

• Gap insurance covers the difference between what your standard auto insurance pays and what you owe if your leased car is totaled.

• Gap insurance is important for leased cars because of rapid depreciation and lack of equity.

• Make sure you understand exclusions that may not be covered.

• While costs vary, gap premiums typically add $10-$30 per month to your lease payment.

• Gap coverage is worth it for the peace of mind against owing thousands.

• Shop around and use discounts to find the best gap insurance rate.

Don’t get “gapped” by a total loss – make sure your leased vehicle has this valuable additional protection.