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Car insurance needs for leased vehicles

If you're planning to lease a car, it's important to understand the fees worked into your contract: You've got early-termination costs, extra-mileage surcharges and wear-and-tear fees. But you should also be aware of the "hidden" costs of car insurance required by the lease and the ramifications of crashing your leased vehicle — especially if you "total" it.

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Most leases require you to purchase more car insurance than your state's minimum liability coverages. For example, you'll likely have to purchase liability coverage of $100,000 per person and $300,000 per accident for bodily injury, and $50,000 worth of liability insurance for property damage (also known as 100/300/50). Most states' minimum requirements are about one quarter of that.

In addition, your lease will likely require you to buy collision and comprehensive insurance, according to the Insurance Information Institute (III). These coverages pay for losses due to fire, theft, vandalism, civil riot and collisions with animals. Both coverages require you to pay a deductible and, depending on your lease contract, those deductibles are subject to a cap.

Leases can limit your choices

Most car leases limit your insurance-shopping flexibility by requiring you to purchase higher-than-minimum levels of liability, comprehensive and collision coverages. Some even require you to purchase uninsured motorist coverage. While robust coverage is a good idea, regardless of your auto-financing situation, lease requirements can limit your financial flexibility.

Without gap insurance, you'll have a "total" nightmare

According to III, many lease contracts require gap insurance — insurance that pays the difference between what you owe on your car lease and what the insurer pays in case your car is "totaled." The cost of gap insurance is generally rolled into the lease payments, but check with your leasing company to make certain.

If you get into a serious accident, your insurer could either "total" your vehicle — paying you or the lienholder the actual cash value of the car — or repair it.

Some insurers will total a vehicle if damages are at or above 51 percent its pre-accident value. Other insurers will total at 80 percent. State insurance departments often set guidelines for the repair-cost threshold at which cars can be totaled.

If your insurance company totals your leased car, whether or not you receive the insurance proceeds directly is of little consequence. Chances are good that you'll have to turn all of that money over to the lienholder, but that's no guarantee you've satisfied your lease contract.

It's not uncommon to still owe money to your lienholder after receiving the value of your car. That's where gap insurance comes in to play. It will pay the remaining lease bill so you can start fresh with a new lease or a new financing deal. If your lease contract does not include gap insurance, it's a good idea to shop around for the best price. Gap insurance premiums run the gamut, but without it, you could be stuck with hefty lease or loan payments on a car you no longer drive, plus the payments for your replacement car.

One important stipulation of many lease contracts that include gap insurance is that if you don't buy the required comprehensive and collision coverages and your car is totaled, you will not receive the gap coverage.

One important stipulation of many lease contracts that include gap insurance is that if you don't buy the required comprehensive and collision coverages and your car is totaled, you will not receive the gap coverage.

In addition, until you or the lienholder receive the insurance proceeds, you should continue making your regular monthly car-lease payments. If you stop, your loan could default and tarnish your credit record. That can hinder your ability to get new auto financing and new car insurance.

Scrutinize your repairs

After an accident, if your insurer decides to repair your vehicle rather than totaling it, make sure the repairs will not create further problems for you at the end of your lease. Most lease contracts say you're responsible for "excess wear and tear."

That includes any damage, even if it's covered by insurance. The bottom line is that you want to return your vehicle to the dealership in the same condition as when your lease began.

That means making certain your vehicle is repaired with original equipment manufacturer (OEM) parts and that the paint and tires are the same as when you started leasing it. Find out about your insurer's rules when it comes to replacing sheet metal parts after an accident. Insurance companies have different policies on OEM parts. Some guarantee them. Others may use a mix of OEM parts and non-OEM parts. For example, an insurer may use OEM parts to repair your engine but non-OEM parts to replace a battery or headlight. Check your car insurance policy for details. No matter what, you can always request OEM parts when your car is being repaired. But if it's not included in your policy, your insurance company may require you to pay the difference between OEM and non-OEM parts.

Leasing a car might be an affordable option, but if you're involved in an accident, make sure you meet the lease's terms or you can find yourself facing extra costs and inconvenient scenarios.

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