New car replacement insurance is an optional type of auto insurance that pays to replace a totaled car with a brand-new vehicle of a similar make and model. Without new car replacement insurance, drivers are only reimbursed for their totaled car’s actual cash value, which is often not enough to pay for a replacement.
Key Things to Know About New Car Replacement Insurance
- New car replacement insurance is usually only available for cars under a certain age or mileage.
- The cost of new car replacement insurance is about 5% of your auto insurance premium, on average.
- Six of the 10 largest car insurance companies offer new car replacement coverage.
- New car replacement insurance is often purchased with gap insurance.
- In most cases, new car replacement coverage is a worthwhile investment.
How New Car Replacement Insurance Works
New car replacement insurance covers the difference between a totaled car’s actual cash value and the cost of purchasing a new vehicle of the same make and model. Actual cash value (ACV) is what a car was worth immediately prior to being totaled, and it’s affected by factors such as depreciation and previous damage. In most cases, the ACV is not enough to cover a brand-new replacement vehicle, so new car replacement insurance is a great way to avoid paying out of pocket for a new car.
New Car Replacement Insurance Example
New car replacement insurance only applies if your vehicle is declared a total loss, and you’ll typically be required to pay a deductible. Coverage is generally only available for new cars, and policyholders must also purchase collision and comprehensive insurance.
For example, if you purchase a new car for $25,000, it may lose around $5,000 in value after you drive away from the dealership. And if the car is totaled on the way home, you would only be able to recover around $20,000, minus your deductible, unless you have new car replacement insurance. With new car replacement coverage, you can recover the full $25,000.
What Insurance Companies Offer New Car Replacement Insurance?
|Allstate||Must be two model years old or newer|
|American Family||Must be brand-new; coverage only lasts for one year|
|Erie||Coverage can be added to any vehicle prior to a loss|
|Farmers||Must be two model years old or newer, with fewer than 24,000 miles|
|The Hartford||Must be less than 15 months old, with fewer than 15,000 miles|
|Liberty Mutual||Must be less than one year old, with fewer than 15,000 miles|
|Nationwide||Must be less than three years old|
|Safeco||Must be less than one year old|
|Travelers||Must be less than five years old|
If your insurance company doesn’t offer new car replacement insurance, you should ask if they offer partial coverage. For example, USAA has a car replacement assistance program that adds an additional 20% of the totaled car’s ACV to the final settlement.
New Car Replacement vs. Gap Insurance
New car replacement insurance and gap insurance are not the same thing, though they are occasionally purchased together and both apply to totaled cars. Gap insurance pays for the difference between a totaled car’s actual cash value and the remaining balance on the policyholder’s lease or loan. However, it does not cover the cost of purchasing a new car.
Gap insurance is more widely available than new car replacement, and it doesn’t have strict vehicle eligibility requirements. If your car is leased or financed, gap insurance is a worthy investment. Since vehicles depreciate quickly, gap insurance prevents you from having to continue making payments on a car that you can no longer drive.
Most insurers allow you to purchase both gap insurance and new car replacement coverage, but you should check your company’s specific policies. For example, American Family automatically includes new car replacement for the first year of ownership in its gap insurance policies. And with Travelers, Premiere New Car Replacement policies already include gap insurance.
Cost of New Car Replacement Insurance
New car replacement insurance adds an average of 5% to your premium, depending on the insurer. However, the cost of new car replacement insurance varies widely based on a number of factors, including the driver’s record and the vehicle’s age and mileage.
Is New Car Replacement Insurance Worth It?
New car replacement insurance is worth it if you own a new car or are looking to purchase one soon. A brand-new car will start depreciating as soon as you drive it off the lot, and if it’s totaled within the first few years, the actual cash value likely won’t cover the cost of a replacement.
If you’re struggling to decide whether or not to purchase new car replacement insurance, consider the type of car that you drive and your financial situation. Some cars, like luxury sports cars and electric vehicles, depreciate rapidly, making new car replacement especially useful. Even if your car will only steadily lose its value over time, you need to think about whether or not you’d be able to pay partially out of pocket for a replacement vehicle. If not, then the low cost of new car replacement insurance makes the coverage worth it.