One of the attractions of leasing a car is that it generally requires a much smaller upfront outlay of cash compared to what purchasing a car might require.
This preference to minimize an upfront cash payment may mean that some individuals may also roll into the lease payment other associated costs, including the capital-reduction amount (or down payment).
While the predictability of a known payment amount for a set period of time may be convenient, rolling up such costs into the lease payment may create a financial risk in the event that you experience a total loss from an accident or similar misfortune. In some cases, what you owe may exceed the value of the car and the amount of the reimbursement you receive.¹
You can protect yourself against this potential risk by buying gap insurance, which is designed to cover the difference between what conventional auto insurance covers and what you owe at the time of the loss.
Gap insurance may be added to your existing auto policy or purchased separately.
How Much Gap Insurance Do I Need?
The gap between the value of the car and what you may owe is predicated on a number of variables, such as the depreciation of the car, the number of payments made and even the nature of the deal you negotiated. As you might have guessed, the relationship between these variables means that the amount of gap insurance you may need can vary over time.
To obtain adequate coverage, you should contact your insurance agent and work with him or her to determine the necessary coverage amount.
- The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.