New Car Replacement Insurance

New Car Replacement Insurance

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New-car replacement coverage is a form of insurance available to policyholders with brand-new cars, so long as they have collision and comprehensive coverage. If your car is totaled in an accident within a certain period after you buy it — typically between one and three years — new-car replacement insurance will pay for the full replacement cost of a new car that's the same make and model as the one you had. You'll only be responsible for paying the deductible associated with your comprehensive or collision coverage.

What is new-car replacement insurance?

Cars depreciate over time, losing value as they get older and rack up miles. Brand-new cars lose their value the fastest. So if your car is totaled soon after you purchase it, you'll be without a car, and the amount your insurer pays out likely won't cover an exact replacement. This is because comprehensive and collision coverages only cover the actual cost value, or ACV, which factors in depreciation.

Additionally, more expensive vehicles tend to lose their value faster than less-expensive automobiles.

New-car replacement insurance makes up the price difference between your depreciated model and a brand-new car.

Some insurance companies take new-car replacement coverage a step further and may pay for a newer model year than the one you previously owned, making it an extra-appealing option in those cases.

Is new-car replacement coverage worth it?

There's no simple formula to determine whether new-car replacement insurance is worth the cost, just as there's no formula to set the correct level of liability coverage. It depends on how much risk you're willing to tolerate or how much you're willing to pay to protect yourself against the risk. When deciding whether you want to add replacement coverage to your insurance policy, consider:

  • Whether your car is likely to be totaled in an accident.
  • How quickly your car is depreciating. Newer and more expensive cars depreciate faster, making replacement coverage a greater value.
  • Whether you can afford to replace your car without this type of coverage.
  • The amount your insurance company charges for coverage.
For example, a brand-new $60,000 luxury sedan will likely depreciate by about 25% — or $15,000 — within the first year. To decide whether new-car replacement is worth it, consider the likelihood your car will be in an accident and whether the coverage is worth the extra monthly expense. New-car replacement coverage on a $60,000 vehicle costs around $15 extra per month from Farmers Insurance.

Ultimately, the best way to determine whether new-car replacement is worth it for you is to consider whether the additional cost is justified by the peace of mind it offers. With new-car replacement coverage, you'll be able to drive and enjoy your new car without worrying about what would happen if it was totaled in an accident.

The cost of new-car replacement insurance

The cost of new-car replacement insurance varies significantly by insurance company. It's typically an optional coverage, meaning you'll pay extra on top of a standard auto policy to get it. But the exact amount you'll pay depends on:

  • Your driving history
  • The type of car you own
  • The individual policy

The only way to get a definitive answer is to get a quote.

What companies offer new-car replacement?

New-car replacement insurance is available from many insurers, but not every company offers it. Among the 10 most prevalent insurers in the United States, new-car replacement coverage is available at:

  • Allstate
  • American Family
  • Farmers
  • Liberty Mutual
  • Metlife
  • Nationwide/Allied
  • Travelers

New-car replacement coverage eligibility

Since the difference between your car's actual cash value (ACV) and replacement cost only grows over time, most insurers limit how long they'll provide replacement coverage for your new car. The exact restrictions vary by insurer, but the limits typically include a maximum age and mileage. You're also usually required to purchase comprehensive and collision coverage in order to qualify for new car replacement insurance.

Insurer
Eligibility requirements
AllstateCar must be 2 model years old or newer
FarmersCar must be newer than 2 years old and have fewer than 24,000 miles
Liberty MutualCar must be under 1 year old and have fewer than 15,000 miles. Older cars are eligible for "better car replacement," which provides a car 1 year newer with 15,000 fewer miles than yours had pre-accident.
Nationwide (through Allied)Car must be newer than 3 years old
TravelersCar must be less than 5 years old, and you must be the original owner
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New-car replacement vs. gap coverage

Gap coverage is a type of insurance that's available to drivers who have a lease or loan on their vehicle. New-car replacement and gap coverage both help make up the difference between the ACV of your car and what it will cost for you to replace the vehicle, if it is totaled in an accident.

However, gap coverage only pays off your lease or loan amount, so you won't owe money on a car you no longer own. New-car replacement goes one step further and pays for the entire replacement cost of a new vehicle identical to the one you had.

For example, let's say you bought a new car for $25,000. After 12 months, it's worth $20,000, and you still owe $22,000 on the loan. If you were in an accident and the car is totaled, your collision coverage would pay what the car is worth, or $20,000 minus your deductible.

New-car replacement coverage would pay for an identical brand-new car — in this case, an additional $5,000. Gap coverage would only cover the difference between what collision pays and what you owe — in this case, $2,000. You wouldn't have a car, but you would not owe any money on your car loan, either.

The following graph shows the payout of new-car replacement coverage after your car is totaled.

Graph showing payout of new car replacement coverage after your car is totaled

This graph shows how gap coverage can help following an accident.

Graph showing payout of gap coverage after your car is totaled

Gap insurance is a more commonly available alternative to new-car replacement. It's offered by Geico, Progressive, State Farm and USAA, none of which provide new-car replacement insurance.

If you are buying a new car and your insurance company doesn't offer new-car replacement insurance, you might consider adding gap coverage instead if you want to stay with your current insurer.

Mark is a Senior Research Analyst for ValuePenguin focusing on the insurance industry, primarily auto insurance. He previously worked in financial risk management at State Street Corporation.

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