New Car Replacement Insurance

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New car replacement coverage is a form of insurance available to drivers of new cars, so long as they have collision and comprehensive coverage. If your car is totaled in an accident within a certain time after you buy it—typically between one and three years—new car replacement insurance will pay for the full replacement cost of a brand-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 and. And 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 you'll receive from your comprehensive or collision policy won't pay out enough money for you to replace your old vehicle with the same. This is because comprehensive and collision coverages only cover the actual cost value, or ACV, which factors in depreciation.

Additionally, more expensive vehicles like luxury cars tend to lose their value faster than less-expensive automobiles. New car replacement insurance makes up the difference in price between your depreciated model and a brand-new one, so drivers who own luxury cars will get a bigger payout from replacement coverage than people with cheaper vehicles. And some insurance companies take new car replacement coverage a step further and may provide you with 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, conversely, it depends how much you're willing to pay to make the risk of losing your brand-new car disappear. When deciding whether you want to add replacement coverage to your insurance policy, consider:

  • How likely your car is to be totaled in an accident
  • How quickly your car is depreciating. Newer and more expensive cars depreciate faster, making replacement coverage of greater value.
  • Whether you would be able to afford to replace your car without it.
  • The amount your insurance company charges for coverage.

For example, if you recently purchased a new $60,000 luxury sedan, it's likely to depreciate by about 25% of its value, or $15,000, in the first year. To decide whether new car replacement is worth it for you, consider the likelihood your car will be in an accident and whether it's worth the extra monthly expense to be able to replace your car should you be in an accident. or a $60,000 vehicle, we found that new car replacement 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 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 and the individual insurer's policies, so 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 have a cap on 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, as well as a maximum mileage. You're also usually required to purchase comprehensive and collision coverage in order to qualify for new car replacement insurance.

InsurerEligibility 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 one 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.

New Car Replacement vs. Gap Coverage

Gap coverage is a type of insurance that is similar to new car replacement and is available to drivers who have leases or loans on their vehicles. 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 that you can avoid owing money on a car you no longer possess. 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, imagine you bought a new car for $25,000. Say that 12 months after you buy it, 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 $20,000 (minus your deductible).

If you have new car replacement coverage, your insurance company would pay you enough to to buy an identical brand-new car—in this case, an additional $5,000.

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

However, if you have gap coverage, you'd only receive another $2,000, so that you're at zero. You wouldn't have a car, but you would not owe any money on your car loan, either.

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 replacement car 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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