Imagine getting a new car just for an accident to happen a few months later. In the worst case scenario, your car would be completely totaled. This leaves it up to your insurance company to decide how much money you’ll receive for a replacement.
Without the proper insurance coverage, a brand new car that’s totaled can cost you enormous out-of-pocket costs. Since new cars lose value quickly, basic insurance coverage won’t suffice. This leaves you with the burden of thousands of dollars in replacement costs.
In some situations, purchasing new car replacement insurance can be a smart add-on to an auto insurance policy. This extra coverage will help ease the burden of replacing a new car, especially when a payout is significantly less without the added insurance.
How does new car replacement insurance work
New car replacement insurance eases the financial burden of having to replace a brand new car that has been totaled. Under this coverage, the insurance company will reimburse you for a new vehicle of the same make and model. But minus the deductible.
Cars are depreciating assets. They are immediately worth less than you bought them for once you drive them off the car lot.
This matters for insurance. If you bought a vehicle brand new for $30,000, it’s likely your insurer will value it for less. This is even if you’re in an accident a short time after you bought the car.
An accident puts a great deal of financial strain on you, especially when the car is new that’s where new car replacement insurance can help.
Usually, this insurance coverage is only available on cars two years old or newer. It does not cover leased vehicles, and usually only applies under a limited time (such as one to two years) and miles (such as 15,000 or less).
Some insurance companies also require new car insurance policyholders to have collision and comprehensive insurance.
Cost of new car replacement
The cost of new car replacement insurance varies by insurance company and isn’t offered by all of them. And some states don’t offer the coverage.
Generally adding new car replacement coverage to your policy shouldn’t cost much.
Robert Norberg, president of Arden Insurance and the Independent Insurance Agents of Palm Beach County, uses a simple analogy with his clients to help him decide: think about a small purchase you’re willing to sacrifice once a week, every week, for a year.
“On most personal auto policies (prices vary by company) the cost is typically much less per year than a cup of coffee each week at your favorite café,” Norberg says.
To purchase new car replacement insurance, you can call your auto insurance provider and it can be added on to your current coverage.
Other factors that determine eligibility for new car replacement insurance include a driver’s driving record so keep that in mind while applying.
Collision coverage vs. New car replacement
Collision coverage is standard auto insurance coverage but differs from new car replacement. New car replacement is an add-on to insurance. This means it enhances standard collision coverage. It will pay out more in the case of a totaled vehicle.
Collision coverage helps pay for repair or replacement costs if your car crashes into an object or another car. Under collision coverage, damage to your car is covered up to the total value of the car, minus the deductible. This coverage is recommended if you’re leasing a vehicle or you’re paying off a vehicle loan.
The main difference between the two coverages is how much you will be compensated in an accident.
Unfortunately, cars depreciate in value as soon as you drive it off the lot. With collision coverage, it’s likely you will receive much less than the purchase price of the car because of this. If you total the car, you would most likely have less money to buy a replacement.
With new car replacement, you wouldn’t be faced with as many out-of-pocket costs, should you total your car. The insurance company will provide you the money for a brand new car and not just for the depreciated value of your old car.
Gap insurance vs. New car replacement
Gap insurance is similar to new car replacement but is relevant in different situations. For instance, this coverage is necessary when someone leases a vehicle or takes out a car loan with very little down payment.
Typically, gap insurance will cover the difference between the Kelley Blue Book value and the loan balance. Kelley Blue Book is an automotive research company that determines the value of both new and used vehicles.
For example, a new car costing $25,000 might have a Kelley Blue Book value of $19,000 one year later. When the owner of the vehicle made the purchase, they took out a loan balance of $24,000 and have only paid it down to $21,000.
Gap insurance would cover the difference between the most recent Kelley Blue Book value ($19,000) and the loan balance ($21,000), or $2,000, in the case of a total loss.
Norberg cautions people who might be considering taking out gap coverage directly with their car dealer. In some cases, it’s usually more expensive. He advises you to look directly at the policy. You should know exactly how much coverage your gap insurance will be providing.
“Be cautious, however, as some companies limit the coverage to the “book value” plus 20 percent,” says Norberg. “People who do not lease or who put a lot of money down on a new car small loan likely would not benefit from buying gap insurance.”
Better car replacement vs. new car replacement
Something to consider is whether you want better car replacement instead. It’s a policy that’s offered by some insurance companies that’s similar to new car replacement. But the way you are compensated works slightly differently.
If you have the better car replacement coverage, you will receive a newer model year vehicle than the one that was totaled after a collision. It’s not offered by all insurance companies or even in all states.
Similar to new car replacement, it’s an added cost for optional coverage. But if it appeals to you, you should ask your insurance agent about it.
Is new car replacement insurance worth it?
Norberg says the relevancy of new car replacement insurance varies from person to person — and each policy is different. However, he says new car replacement insurance is low-cost over a year. And it would be a wise investment for people who have purchased a new vehicle.
“The cost of this coverage (if offered) is likewise typically inexpensive,” Norberg says. “I recommend this to all consumers when available as the potential benefits outweigh the cost and everyone wants a new car if theirs gets totaled.”
With this in mind, you ultimately determine whether the added cost of new car replacement is worth it for you for the peace of mind that it offers. With new car replacement, you won’t have to worry about what would happen if your new car was totaled in an accident.
As with any insurance coverage, read the fine print. If you don’t have new car replacement insurance, be sure you have enough funds in your savings. You want to be sure you can cover costs you may incur if your vehicle is damaged.