Driving a shiny new car off the lot is a thrill. Less thrilling is when your new vehicle gets totaled in an accident, leaving you on the hook for the full balance of your car loan and the burden of finding a new ride.
New car replacement insurance can help cover your losses and ensure you can afford a comparable replacement car. Let’s take a closer look at what new car replacement insurance is, what it covers, and if it’s worth it for your wallet.
What is new car replacement insurance?
Most new vehicles and motorcycles depreciate as soon as you drive them off the lot. While this depends on multiple factors, such as the make, model, and age of the vehicle, Kelley Blue Book indicates that the average car loses as much as in the first year of ownership.
This puts owners of new cars in a jam because car insurance only pays for the car’s actual cash value (ACV) in the event of an accident. This means you’re holding the bag not only on what’s left on your auto loan but also fronting the extra funds to replace the car.
In the case of a totaled vehicle, new car replacement insurance covers the replacement cost of a car that is the newest comparable model year.
It’s worth mentioning that not all insurance companies offer new car replacement insurance, and eligibility for coverage depends on your vehicle’s age (usually two years old or newer) and whether you carry and .
How does new car replacement insurance work?
In a nutshell, new car replacement coverage reimburses you for the purchase price of your new car. But there are some common eligibility requirements for adding this optional coverage to your insurance policy, including:
You must carry collision and comprehensive coverage on the car.
In order to be eligible for this extra coverage, you must have collision coverage and comprehensive insurance on the vehicle. (You could also have a full coverage car insurance policy, which includes these coverage options.) Expired coverage will invalidate your new car replacement insurance.
Your car must be relatively new.
Vehicle age requirements vary, but some auto insurance companies offer new car replacement coverage only for cars one year old or less. Allstate specifies cars must be two years old or newer. Travelers Insurance offers coverage for the first five years of vehicle ownership.
Mileage requirements (25,000 miles or under) may apply.
In addition to or instead of an age requirement, some insurance companies such as Farmers Insurance impose a cap on mileage.
You must be the original owner.
Leased vehicles aren’t eligible for new car replacement coverage. If you purchased a relatively new used car, you’re also out of luck because no matter how many years of ownership you have under your belt, you need to be the original owner to be eligible for new car replacement insurance.
You must add insurance coverage during the specified timeframe.
Several auto insurance companies stipulate that this extra coverage has to be purchased within a specific window, such as within six months of buying a new car.
The best way to explain how new car replacement works is with an example. Let’s say after several years of scrimping and saving, you squirrel away enough to buy your brand-new dream car, a BMW 4 series convertible at a cost of $62,000. But after a couple months, someone slams into you, and your new Beamer is now a totaled car.
At the time of the accident, your vehicle was valued at $50,000, which is what you’d receive as a payout from the insurance company. However, if you have new car replacement insurance, it pays the full $62,000, minus your .
So you could replace your BMW 4 series convertible with a brand new version of the same make and model year.
What is better car replacement coverage?
If you’re not eligible for new car replacement insurance (or if your insurance company doesn’t offer it), you may be able to get an insurance product called better car replacement insurance.
Better car replacement works similarly: It promises that if your vehicle is totaled, you’ll be provided with a slightly newer car (within one to two model years) with less mileage. For example, Liberty Mutual’s better car replacement insurance reimburses for the additional cost of a replacement car that is one model year newer with 15,000 fewer miles than your vehicle if it is deemed a total loss.
New car replacement insurance vs. gap insurance
In considering whether to get new car replacement insurance, you may wonder how it differs from guaranteed asset protection coverage, aka . While these two types of coverage help protect against financial losses from vehicle depreciation, they do so in different ways.
Gap coverage is primarily for those who owe money on their car loan or lease. It’s often required by lenders. In the event of an accident where the vehicle is totaled, gap insurance covers the difference between the value of your vehicle at the time of the accident and the balance remaining on your auto loan. Unlike new car replacement, gap insurance pays for what you owe but not for the extra cost of a car replacement.
How much does new car replacement coverage cost?
Before you can decide if coverage is worth it, it helps to gauge new car replacement insurance cost and value. Quotes vary according to insurance provider, driving history, whether you have multiple vehicles on the policy, auto security features on your vehicle, and many other factors.
In general, adding new car replacement coverage to your existing auto insurance policy should result in a rate increase of around 5%, but you should contact your insurance agent for more information.
4 reasons to get new car replacement coverage
While it’s not the best solution for everyone, here are a few scenarios where adding new car replacement insurance to your auto policy may be worth every penny.
1. Your car is a new vehicle.
New car replacement insurance is tailored to newer vehicles for a reason. It’s typically only worth the additional cost when you’re considering a more sizable financial loss in the event of an accident.
2. Your new car is on the expensive side.
Getting a new vehicle like a sports car or a big SUV is an investment that usually doesn’t pay off for a few years. If you plan to keep your car for the next decade, it makes sense to protect that investment up front.
3. Your new car has an unusually steep depreciation rate.
Calculate the difference between your and the purchase price, then decide if you’d be comfortable paying that cost out of pocket to replace your car in the event of an accident. Some cars, like , depreciate much faster than others.
4. You have greater risk factors for an accident.
Being at involves more than driving habits and age. For instance, you may live near a dangerous intersection or in a part of the country where weather-related crashes are more frequent.
Is new car replacement insurance worth it?
In this era of spiraling insurance rates, everyone’s looking for . That said, new car replacement insurance is relatively inexpensive and is worth the investment if your brand new vehicle is expensive or if you have several risk factors for an accident.
Just be sure to keep an eye on your insurance policy and cut the coverage once your car is no longer eligible either due to vehicle age or mileage. If your insurance company doesn’t offer new car replacement insurance, consider other types of coverage that will protect you from the financial loss of vehicle depreciation. This includes gap coverage and better car replacement coverage.
FAQs about new car replacement coverage
1. Do I have to pay my deductible for new car replacement claims?
Generally, with the exception of some states that require insurance companies to waive deductibles for glass or claims, you’ll have to pay your deductible to activate coverage when you . This would include a new car replacement claim.
2. Who offers new car replacement coverage?
It’s important to note that not every insurance company offers new car replacement coverage or has the same eligibility requirements, so you should contact your insurance team for more information and shop around for multiple car insurance quotes.
For instance, while Liberty Mutual offers both new car and better car replacement insurance, State Farm doesn’t offer either type of coverage. Erie Insurance provides a variation on this insurance product called auto security that’s available to add to a policy for both new and used cars.