What Is New Car Replacement Insurance?
New car replacement insurance, also known to many consumers as gap coverage, is a type of insurance that provides coverage for new vehicles in the event of a total loss due to an accident, theft, or other covered peril. This is an optional add-on you can add to your policy when you purchase a new car. If the vehicle is declared a total loss, the insurance company gives the policyholder enough cash to repurchase the same year, make, and model as the totaled vehicle.
Most financiers require that new car owners have comprehensive and collision insurance on their vehicles before they drive off the lot. But cars quickly depreciate, losing between 15-20% of value within the first year. This depreciation can leave the policyholder paying thousands out of pocket to replace their vehicle if it’s totaled.
Table of Contents
Protecting Your Investment
Investing in a brand new car can be an exciting experience, but it also comes with the responsibility of protecting your valuable asset. One option that can provide peace of mind is new car replacement insurance. In this article, we will explore how new car replacement insurance works and the benefits it offers.
When unfortunate events such as accidents or theft result in a total loss, this coverage steps in to replace your vehicle with a brand new one or a comparable alternative, minimizing the financial impact and ensuring you can maintain your investment. Discover how new car replacement insurance can safeguard your automotive investment and provide you with added security in uncertain times.
The Rules and Regulations Behind New Car Replacement
Not all insurance companies offer new car replacement insurance. The companies that do vary widely in their coverage. What is across the board is that you have a limited time to add new car replacement insurance for your vehicle. Depending on the insurer, you can have anywhere between 30 days and 18 months to add the policy. The coverage will only last a certain amount of time, usually ending after 1-3 years of owning the vehicle or a set number of miles.
Each insurance company will have specific restrictions on what perils are covered by their policy. You should check with your car insurance provider for exact coverage rules and regulations.
What are the Benefits of New Car Replacement?
With new car replacement, the insurance company would pay out the value of the policyholder’s totaled vehicle. The driver would just be responsible for covering their deductible.
In comparison, actual cash value coverage pays what the vehicle was worth at the time of the loss if it’s totaled. This could leave a substantial financial gap between the actual value of the car and the remaining loan amount or the amount it would take to replace the car with one of a similar caliber. New car replacement coverage takes care of that gap.
Understanding Vehicle Depreciation
A new car starts to depreciate as soon as the owner drives it off the car lot. They also depreciate the fastest within the first five years of ownership. While depreciation over time can be somewhat mitigated with regular maintenance, car owners cannot stop a vehicle from aging.
For example, a vehicle priced at $35,000 may only be worth $28,000 one year after the purchase because of depreciation. If the car were totaled in an accident after six months, the collision coverage would pay the policyholder $28,000 for the car. The policyholder would have to pay $7,000 out of pocket to replace their vehicle with the same year, make, and model only one year after the purchase. With new car replacement coverage, the insurance company would pay the sticker price for the vehicle minus the policyholder’s deductible.
Do You Get a New Car if Your Car Is Totaled?
If the car is totaled while it’s still within the required parameters of the new car replacement insurance, the insurance company will pay to replace it with a car of a similar year, make, and model. This means that if your 2019 Toyota Camry were totaled, they would give you a check to purchase another 2019 Toyota Camry.
Some insurance companies take the coverage a step further with better car replacement. With this coverage, they’ll give you a check for a car of a similar make and model that’s newer and with fewer miles than the damaged one.
How Much Does New Car Replacement Coverage Cost?
As with all insurance coverage, the answer is it depends. Each insurance company weighs several factors when assessing a driver’s risk and setting their rate. Companies will consider the car’s cost, the driver’s residential neighborhood, and the driver’s driving history during the underwriting phase.
Generally speaking, however, new car replacement insurance adds roughly 5% of the policy cost to the total. Some companies offer free coverage, while others include it as part of an upgrade package.
Average Annual Price of Replacement Coverage | |
|---|---|
Company #1 | $0; included in upgrade package |
Company #2 | $105 |
Company #3 | $243 |
Company #4 | $348 |
Company #5 | $556 |
Company #6 | $780 |
Who Is a Good Candidate for Car Replacement Coverage?
New car replacement coverage might appeal more to some policyholders than to others. Those with high-end cars or other vehicles that depreciate quickly would be good candidates for coverage. Thankfully, policyholders can easily meet the below requirements to add the coverage to their policy.
You Have Collision and Comprehensive Coverage
Comprehensive and collision coverage are standard coverages offered by most insurance companies. Both coverages carry their own deductibles. Collision coverage pays for and sets up repairs after a covered vehicle has been damaged due to a collision. Comprehensive coverage pays for repairs after a covered vehicle is damaged due to things other than a collision with another car, such as theft, natural disasters, and damage from hitting an animal.
Insurance companies typically require that drivers carry comprehensive and collision coverage to be eligible for new car replacement insurance. If the car is damaged but is deemed repairable, these coverages would kick in to pay for the repairs.
You Meet Age and Mileage Requirements To Qualify
The age and mileage requirements for coverage varies from company to company. Generally, however, the coverage only applies to vehicles purchased new and owned by a single owner. This rules out leased vehicles and motorcycles.
The coverage extends to vehicles until they’re about three years old or until they’ve wracked up between 15,000 miles and 30,000 miles, depending on the company. If the car exceeds the minimum requirements, the coverage will either change to another coverage type, like gap coverage, or fall off completely.
Your Insurance Has a Deductible
A deductible is a portion of the repairs that the policyholder is responsible for paying out of pocket. Comprehensive and collision coverages carry separate deductibles that the policyholder selects when setting up their coverage. The policyholder must pay the deductible to receive the new car payout.
Alternatives to New Car Replacement Coverage
Not all insurance companies offer new car replacement coverage. Luckily, drivers have other options to protect their investment during the car’s depreciation period.
Depreciation Waiver
Ask your insurer about a depreciation waiver. Some insurance companies offer depreciation waivers as an add-on to your collision coverage. This waiver allows you to receive the full value of a covered claim without considering depreciation. It helps mitigate the impact of depreciation on your claim payout, although it often does not provide the same level of coverage as new car replacement insurance.
Better Car Replacement
Like new car replacement coverage, better car replacement coverage replaces a policyholder’s car if it’s declared a total loss. Where they differ, however, is that a better car replacement policy will replace a driver’s totaled car with one of a similar model that’s one year newer and around 15,000 miles less than the one they lost.
While this is an attractive option, this coverage is only available through a select few companies and excludes motorcycles and leased vehicles.
Gap Coverage
Gap coverage pays if the car is totaled during the first few years of ownership. A car depreciates the most within the first five years, with some cars dropping as much as 40% during that time. New vehicle owners that put less than 20% down and pick the longest repayment plan run the risk of the car depreciating faster than they’re paying it off. If the driver totals the car in an accident, the insurance company will only pay what the vehicle was worth.
This could leave a substantial gap between what the insurance pays and what the policyholder owes for the loan. Gap coverage kicks in to pay the difference between the car’s depreciated actual cash value and the balance of the loan.
Putting It All Together
In conclusion, new car replacement insurance offers valuable benefits to protect your investment in a brand new vehicle. It ensures that in the event of a total loss, you can replace your car with a brand new one or a comparable alternative, minimizing the financial impact.
It’s important to carefully evaluate your circumstances and consider your options when deciding how to protect your investment during the depreciation period. Consult with your insurance provider for further guidance in selecting the most suitable coverage for your needs.