It’s one of the oldest adages in the car industry: the minute you drive your shiny new car off the lot, the value drops by several thousand dollars. A new car depreciates by roughly 20 percent in the first year of ownership. So, if you total your car in an accident or it gets stolen, do you only get the depreciated amount from your insurance company?
Not always. If you have new car replacement insurance, you will receive enough in your payout to purchase a new car of the same make and model, minus your deductible. So, is new car replacement insurance worth it? Let’s take a closer look.
What is new car replacement insurance?
New car replacement insurance is optional coverage you can purchase on top of the liability insurance your state mandates.
Usually, new car replacement insurance is only allowed if your car is less than a couple of years old or has under a certain amount of mileage (often 15,000, or roughly the average mileage that most people drive in a year). Some insurers also require you to carry collision and comprehensive coverage to have new car replacement insurance.
This insurance generally costs about 5 percent of the amount of your total coverage, so if your policy costs $1,000 a year, the new car coverage portion would add about $50.
Normally, your insurance would pay you the depreciated amount of your car if it’s totaled or stolen. But with new car replacement coverage, your check will be more: in fact, it should be enough for you to purchase the exact same car as the one you lost.
How does new car replacement insurance work?
Let’s say you bought a new 2019 Honda Civic Sport for $22,000. You purchase new car replacement insurance. Six months later, you are T-boned at an intersection, and the insurance adjuster declares your car totaled.
If you did not have new car replacement insurance, you would receive the depreciated market value for the car, which would be roughly $19,000 (minus your deductible). With your new car replacement coverage, however, you’ll receive a check closer to the $22K (again, minus your deductible) you paid for the car – enough to purchase another 2019 Honda Civic Sport.
Where to buy new car replacement insurance
Not all companies offer you the option of new car replacement coverage. Here are some who do:
- 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. It also includes gap coverage.
You won’t find new car replacement insurance at several major companies, including Geico and State Farm.
New car replacement insurance vs. gap insurance
Although gap insurance is similar, these coverage types are not the same thing and generally you’ll pay separately for each of them. Learn the difference between new car replacement insurance vs. gap 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. In other words, it covers the gap between your car’s actual cash value (ACV) and the amount you owe on the vehicle.
So let’s take another look at our 2019 Honda Civic Sport. You took out a loan to purchase the car, and now you still owe $21K on it. If you don’t have new car replacement or gap insurance, you’ll receive the car’s ACV of roughly $19K, minus your deductible. That leaves you still owing $2K more than you received.
Gap insurance would give you that additional $2K so you could pay off the loan. New car replacement will give you the amount needed for a new car like the one you lost regardless of the amount on your loan.
Both mean that you’ll probably get a larger payout if your new car is totaled, but new car replacement means your payout will allow you to buy a new car. Gap insurance would give you what you needed to pay off the loan on the old one.
Is new car replacement insurance worth it?
Only you can decide if new car replacement insurance is worth it. Here are a few factors to consider:
- Your financial situation: If buying that new car took just about every penny you have, you might want to skip anything over your state’s minimum insurance requirements. But keep in mind that you’re taking a risk on the possibility of an accident that totals your car.
- The likelihood of an accident: If you only drive a few miles to work and shopping or don’t do a lot of high-traffic driving, you’re less likely to have an accident that would total your car, and less likely to need new car replacement coverage.
- The cost of your car and its depreciated value: Some cars, such as sports cars, depreciate more quickly than others. If your car depreciates quickly, new car replacement insurance could be a good idea.
- The type of car you drive: Cars that depreciate more slowly, such as Toyotas and Volvos, hold their value through the first few years. So the check you get from your insurer following an accident that totals your car, even without new car replacement insurance, will be higher.
In general, if you can afford new car replacement insurance and your insurer offers it, it’s a good idea to add this coverage. No one likes to imagine that their new car might be totaled soon after they purchase it, but if it happens, you’ll receive a larger payout with new car replacement coverage.
Frequently asked questions
How much does new car replacement insurance cost?
Talk to your insurance agent to find out the costs for new car replacement coverage for yourself because it varies from person to person.
Can I get new car replacement insurance if I purchase a used car?
Generally, no. Most insurers require you to be the first titleholder of a new car to purchase this coverage. A better bet for you in that case would be to consider gap insurance, so that you can pay off the remainder of your car loan in the event of an accident.
Do I have to buy new car replacement insurance when I buy my car, or can I get it later?
Some companies allow you to purchase it any time within the first year or another period of time. Nationwide, for example, will add it to your policy any time within your first six months of owning the car, as long as it’s before an accident.