New car replacement insurance

It’s always exciting to buy a new car. It also means that you might have to replace your car if something happens to it. Unfortunately, a vehicle’s value will begin to decrease the moment it is driven off the lot. Your insurer will pay the depreciated amount if you have only the standard coverage. If you purchased the replacement car add-on, your insurer could pay you enough to buy a new car with the same make and model.

What is the definition of new car replacement insurance?

New car replacement insurance is optional coverage you can purchase on top of the liability insurance your state mandates.

New car replacement insurance is usually only available if your car has less than two years of age or has less mileage (often 15,000 or the average annual mileage of most people). To get new car replacement insurance, some insurers require that you have collision and comprehensive coverage.

The average cost of this insurance is about 5 percent of the total amount of your coverage. For example, if you have a $1,000 policy, the new car coverage would be about $50.

Your insurance will normally pay the depreciated value of your car if it is totaled or stolen. With new car replacement coverage, however, your check should be more. In fact, it should be sufficient to allow you to buy the exact same car that you lost.

What is the process of getting new car insurance?

Let’s suppose you purchased a 2019 Honda Civic Sport for $22,000. You buy new car replacement insurance. Six months later, your car is totaled by the insurance adjuster after you’ve been T-boned at an intersection.

You would get the depreciated value of the car if you didn’t have car replacement insurance. This would be approximately $19,000 less your deductible. You’ll get a check that is closer to $22K, again minus your deductible, for your car replacement coverage. This will allow you to buy another 2019 Honda Civic Sport.

Here are some things to know about car replacement insurance

You need to be familiar with the coverage before you buy new car replacement insurance. These conditions apply even if you have this insurance. They could make you ineligible for coverage.

  • Full coverage insurance is required. New car replacement coverage can only be purchased if you have comprehensive and collision coverage. Minimum liability insurance is not sufficient to cover a new vehicle replacement policy.
  • Vehicle age and mileage restrictions: Cars less than one year old and with less than 15,000 miles are usually covered by new car replacement insurance. This feature does not apply to vehicles that have been totaled after this date.
  • Better car replacement than new car replacement: There are some insurers that offer better car insurance. This covers your loss by replacing your car with one year older and having 15,000 more miles. This should not be confused with new vehicle replacement. It allows you to purchase the exact same make and model as you previously owned.
  • A deductible is still required. Even if your insurance pays most of the coverage amount you have to still pay the deductible before the company settles your claim. You will need to have sufficient savings to cover the cost.

Where can I buy replacement car insurance?

Some companies do not offer replacement car coverage. These are some of the companies that offer this coverage:

  • Allstate: Allstate covers cars two years old or less.
  • Ameriprise: You can get new car replacement coverage within the first year of ownership.
  • Erie: This provider covers cars less than two years old; if you’ve had the car longer than two years, Erie pays the cost to replace it with a comparable model that’s two years younger.
  • Farmers: Farmers covers cars within the first two years or 24,000 miles.
  • The Hartford: This provider covers cars for the first 15 months or 15,000 miles, whichever comes first.
  • Liberty Mutual: You can get this coverage within the first year and less than 15,000 miles.
  • Travelers: This covers cars within the first five years for the original owner. This also covers gap coverage.

There are not many major insurance companies that offer new car replacement insurance, such as State Farm and Geico.

Gap insurance vs. new car replacement insurance

Although gap insurance is similar, these coverage types are not the same thing and generally you’ll pay separately for each of them. Find out the differences between gap insurance and new car replacement insurance.

Gap insurance is short for “guaranteed asset protection.” It doesn’t pay for you to purchase a new car, but it does provide you with the money needed to pay off your car loan. It covers the difference between the car’s actual cash worth (ACV), and the amount that you owe.

Let’s take a second look at the 2019 Honda Civic Sport. The car was purchased with a loan, but you still owe $21K. You will receive the car’s ACV, which is approximately $19K, minus your deductible, if you don’t have gap or new car replacement insurance. This means you’ll still owe $2K more than what you received.

Gap insurance will give you the $2K extra to pay off your loan. No matter how much your loan is, a new car replacement will provide the funds you need to buy a car similar to the one you have lost.

Both will result in a higher payout if your car is totaled. However, a new car replacement will give you the money you need to purchase a car. Gap insurance would pay the amount you needed to repay the old loan.

Is it worth buying new car insurance?

Only you can decide whether new car replacement insurance is worthwhile. These are some factors to be aware of:

  • Your financial situation: If you are unable to afford the new car, it might be worth skipping any minimum state insurance requirements. You are taking on the risk of your car being totaled in an accident.
  • Probability of an accident: If your commute is short and you don’t drive too far to shop or work, it’s less likely that you will have an accident that could total your car. You’ll also be less likely need to replace your car.
  • How much your car costs and how quickly it depreciates. Some cars, like sports cars, are more susceptible to depreciation than others. New car replacement insurance is a good option if your car starts to depreciate quickly.
  • Type of car: Vehicles that are slower to depreciate, like Toyotas or Volvos, retain their value for the first few years. Your insurer will give you a higher check if your car is totaled in an accident, even if you have no replacement insurance.

If your insurance company offers new car replacement coverage, and you are able to afford it, it is a smart idea. Although it is not something that anyone likes to think about, if your car does end up in totality, you will receive a higher payout with replacement coverage.

Questions frequently asked

What is the cost of new car replacement insurance?

Because costs vary from one person to another, talk to your agent to determine the cost of new car replacement coverage.

If I buy a used vehicle, can I get replacement insurance?

No. Most insurance companies require that you be the first owner of a new vehicle to purchase this coverage. You might consider gap insurance to cover the rest of the car loan if you are involved in an accident.

Can I purchase replacement car insurance later or must I buy it when I buy my vehicle?

You can purchase it from some companies anytime within the first year, or for another time. Nationwide will allow you to add it to your policy within the first six months after your car is registered, provided it was not involved in an accident.