Residual Value Insurance: What It Is and Why You Need It

If you are leasing an asset, such as a car or equipment, you may have heard of residual value insurance. But what is it precisely, and how can you use it to your advantage?

Residual value insurance is a type of coverage that guarantees a minimum value for a leased asset at the end of the lease term. It protects both the lessee (the person who leases the asset) and the lessor (the person who owns the asset) from the risk of depreciation or market fluctuations that may affect the asset’s value.

Residual value insurance can help you in many ways, such as:

• Reducing your risk of losing money if the asset’s value drops below the expected residual value (the amount you agreed to pay or receive at the end of the lease).
• Increasing your loan-to-value ratio (the amount you can borrow compared to the value of the asset) can lower your interest rate and monthly payments.
• Optimizing your capital by freeing up cash flow and reducing your tax liability.

For example, suppose you lease a car for three years and agree to pay $20,000 at the end of the lease. The car’s expected residual value is $25,000, but due to market conditions, it drops to $15,000. If you have residual value insurance, the insurance company will pay the difference of $10,000 to the lessor, so you don’t have to pay more than the agreed amount. On the other hand, if the car’s value increases to $30,000, you can buy the car at the agreed price of $20,000 and sell it for a profit, or keep it and enjoy the increased equity.

As you can see, residual value insurance can be a smart and flexible option for leasing an asset. But how does it work, and how can you get it? Read on to find out.

How Residual Value Insurance Works

Residual value insurance contracts have four main components: the premium, the insured value, the settlement date, and the settlement method.

• The money you pay for the insurance coverage is called the premium. It is usually a percentage of the expected residual value of the asset, and it can be paid upfront or over time.
• The insured value is the minimum value that the insurance company guarantees for the asset at the end of the lease term. It is usually equal to or slightly lower than the expected residual value of the asset.
• The settlement date is the date when the insurance company pays the difference between the insured value and the actual value of the asset, if the latter is lower. It is usually the same as the end of the lease term or shortly after.
• The settlement method is the way the insurance company determines the actual value of the asset. There are three common settlement methods:
  • Specific asset appraisal: The insurance company hires an independent appraiser to evaluate the asset and provide a valuation report.
  • Actual proceeds: The insurance company pays the difference between the insured value and the amount the lessor receives from selling the asset to a third party.
  • Asset valuation guide: The insurance company uses a published guide, such as the Kelley Blue Book for cars, to estimate the value of the asset.

Residual value insurance is different from other types of insurance that cover leased assets, such as gap insurance or depreciation insurance. Gap insurance covers the difference between the outstanding balance of the lease and the actual value of the asset in case of theft or total loss. Depreciation insurance covers the difference between the original value of the asset and the actual value of the asset at any point during the lease term. Residual value insurance only covers the difference between the insured value and the actual value of the asset at the end of the lease term.

How to Get Residual Value Insurance

If you are interested in getting residual value insurance for your leased asset, you need to follow these steps and requirements:

• Find a reputable provider of residual-value insurance. You can search online, ask for referrals, or consult with your leasing company or broker. Make sure the provider has experience and expertise in your industry and asset type, and check their ratings and reviews.
• Submit an application for residual value insurance. You will need to provide information about yourself, your leasing company, your asset, and your lease terms. You may also need to submit documentation, such as a copy of the lease agreement, an appraisal report, or a valuation guide.
• Get a quote for residual-value insurance. The provider will evaluate your application and determine the premium, the insured value, the settlement date, and the settlement method for your policy. They will send you a quote that outlines the details and conditions of the policy.
• Choose the best residual-value insurance policy for your needs. Compare different options and consider the cost, the coverage, and the exclusions of each policy. Read the fine print and ask questions if you have any doubts or concerns. Once you are satisfied, sign the policy and pay the premium.

Here are some tips and best practices for choosing the best residual value insurance policy for your needs:

• Compare different settlement methods and choose the one that suits your situation and preferences. For example, if you want to avoid the hassle of selling the asset or getting an appraisal, you may prefer the asset valuation guide method. If you want to get the most accurate value of the asset, you may prefer the specific asset appraisal method.
• Negotiate the premium and the insured value with the provider. You may be able to lower the premium by increasing the insured value, or vice versa. You may also be able to get discounts or incentives for paying upfront, renewing your policy, or having a good credit score.
• Review your policy periodically and update it if necessary. You may need to adjust your policy if there are changes in your lease terms, your asset condition, or the market conditions. You may also want to cancel your policy if you decide to buy the asset, terminate the lease, or switch to another provider.

Conclusion

Residual value insurance is a type of coverage that guarantees a minimum value for a leased asset at the end of the lease term. It can help you reduce your risk, increase your loan-to-value ratio, and optimize your capital.

To get residual value insurance, you need to find a reputable provider, submit an application, get a quote, and choose the best policy for your needs. You also need to consider the premium, the insured value, the settlement date, and the settlement method of your policy.

Residual value insurance can be a smart and flexible option for leasing an asset, especially if you are uncertain about the future value of the asset or the market conditions. It can protect you from unexpected losses and give you more options and opportunities.

If you want to learn more about residual value insurance or get a quote for your leased asset, please contact us today. We are happy to answer any questions you may have and help you find the best solution for your situation.

Have you already used it or considered using it? Kindly share your thoughts and experiences in the comments section below.