Buying a New Car Without Insurance

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Before you can take possession of a new car you've bought from a dealer, you'll be required to show proof of financial responsibility (typically through auto insurance). If you already have a policy on another car, you might not need to take out a new policy in order to purchase the car. Most insurance policies will cover your new vehicle up to the limits of your current policy for a period of 4 to 14 days. If you're leasing or financing your new vehicle, your lending company will likely have additional policy requirements you'll need to satisfy before taking possession of the car.

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When to Get Auto Insurance if You're Buying Your First Car

We recommend taking out an insurance policy immediately before buying your first car. First, while some dealers will let you purchase a vehicle without proof of insurance, none can legally allow you to take possession of the vehicle and drive it off the lot without you first showing that the car is insured. (You may, however, take a car for a test drive while it is still owned and insured by the dealer, provided you have a driver's license.) All 50 states and Washington D.C. have minimum amounts of financial responsibility that drivers are required to prove in order to drive legally.

Second, insurance premiums differ according to the vehicle, with more expensive cars being more costly to insure. If you're considering a few different cars, having insurance quotes on hand for each model would help better understand your total cost for owning the cars before you choose among them.

Young drivers may also need to decide whether to purchase their own insurance policy or add their new car to a parent's existing policy. Some parents may be tempted to put their teen on a separate policy in order to protect their current premiums; insurance covering young drivers is expensive, and if a teenager gets into an accident, that will drive up the family's premiums even more. However, it is usually cheaper in total to add a teen to a parent's existing policy.

Third, if you're leasing or financing the vehicle, your lending company will likely have specific insurance requirements you'll have to meet before they allow you to finalize the purchase. While your minimum coverage required by your state may be $25,000 for injury to others and $10,000 for damage to other vehicles or property, leasing companies typically require more—often $100,000 for bodily injury and $50,000 for property damage, on a policy with low deductibles. You should discuss insurance requirements with your lending company before agreeing to any lease, as any extra coverage and reduced deductibles they demand will significantly increase your insurance premiums. Additionally, some leasing contracts include a "forced place" clause that allows the leasing company to select and charge for an insurance policy on behalf of the lessor if they don't provide proof of insurance within a specified window of time.

Once you've decided which car you want to purchase, and have reached a verbal agreement with the dealer, you should contact your insurance agent so they may write up a policy, setting the effective date of the policy for the day you plan to take possession of your new car. You'll need to provide the car's make, model, VIN, and any other information the agent may request. Just be certain that your receipt of the specific car you're planning to purchase is guaranteed, to avoid the possibility of taking out an insurance policy on a car you don't actually end up owning. If you plan to purchase your new vehicle over a weekend, it's even more important to finalize your insurance policy ahead of time, while your insurance agent is readily available.

Do You Need a New Policy if You're Adding or Replacing a Car?

Your existing policy on another vehicle should cover your new car for four to 14 days, so you don't need to change your policy before you purchase the car. This applies whether you're adding or replacing a vehicle. You can make these updates (and any additional coverage you desire) to your existing policy by contacting your insurance agent over the phone. In our experience, larger insurance providers, like GEICO, also allow you to do this easily online.

While you can rely on that older policy for a while, doing so presents a certain risk. In almost all cases, your new car will be worth more than the older insured vehicle whose policy you will be relying upon, if only temporarily. Note, then, that most car insurance policies will only cover our new car against damage or loss up to the Actual Cash Value (ACV) of your current vehicle. As a result, your new car is likely to be underinsured while it's covered under your old policy. Because of that fact, we recommend adding your new vehicle to your policy before taking possession of it, even if that's less convenient. We further suggest include in its policy additional coverage that's recommended for new cars. We'll discuss this more below.

What is New Car Insurance?

New vehicles typically lose around 10% of their purchase value as soon as they're driven off the dealer's lot, and a further 10% to 20% over the course of the first year. Since standard auto insurance policies cover only up to the ACV of the car, then, drivers of new vehicles can find themselves on the hook for a significant amount of money if they total their vehicle during their first year of owning it. However, there are specific types of coverage built specifically for owners of new cars.

New Car Replacement Coverage.

New car replacement coverage is designed to provide you with the full cost of replacing your new vehicle with another one of the same make and model, and with the same features and upgrades. This addition to your policy will increase the premium you'll pay, but it affords you additional protection against the decline in your car's value since you purchased it. Let's say you purchase a new car for $35,000 and it suffers a total loss in an accident nine months later. Without the additional coverage, your car insurance company would likely determine they'd pay out a maximum of $24,500, which would be the car's ACV at that age. That means your insurance company would write you a check for no more than $24,000 (assuming a $500 deductible, or $24,500 - $500), leaving you with a gap of $11,000 to cover if you wanted to replace the car with a new vehicle, which would cost $35,000.

We recommend asking your insurer for new car replacement coverage, then, if only for the first one or two years of your new car's life. On the other hand, if you are comfortable in taking the risk of receiving less for your car than it would cost to replace it, or would accept using the insurer's payout for a different car that costs no more than the ACV payout, then you might opt to skip this financial cushion—and the higher premium that comes with it.

Repair Provision Coverage

Like new car replacement coverage, a policy that includes repair provision coverage up to your vehicle's replacement cost will reimburse you for the repair costs your vehicle has sustained above and beyond the vehicle's ACV.

GAP Coverage

Guaranteed Asset Protection coverage is especially valuable to those leasing or financing their new car. If you total a vehicle you do not yet fully own, you may still be required to make the remaining lease payments, even though your car is not drivable. Your insurance policy will cover up to the ACV of your car, but GAP coverage will cover the difference between the ACV and the amount you still owe (the car's original sticker price).

Daniel is a former Staff Writer at ValuePenguin, covering insurance, retirement and other personal finance topics. He previously wrote about compliance and best practices for K-12 school districts at Frontline Education.

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