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New car replacement insurance: Is it worth the extra cost?

  • Car Insurance Tips
  • Nick Jonathan
  • 8 minutes

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Are you worried about totaling your brand new car? New car replacement insurance could help ease these fears. But what does this type of car insurance cover, and should you get it? Let’s find out.

Buying a new car is one of the biggest purchases you will ever make in your life. It can evoke a slew of emotions. From the highs of the car buying experience to the sense of inner peace you get when you take a long, hard whiff of that new car smell. However, it can also instill abject fear in some drivers. 

What if you’ve just driven off the dealership, only to meet with an accident on your way home? What if you total the car before your lease ends? Will your car insurance pay you enough compensation for buying another vehicle? Will it help pay off the car finance you just took to buy your dream car? The answer to these questions depends on the type of car insurance you’ve purchased. Always remember your car insurance quotes depend on the make and model of the car you purchase.

Read: How much does it cost to insure a car?

What is new car replacement insurance?

Most of you may know that your brand new car starts depreciating the minute you drive it off the dealer lot. That means your car’s value keeps decreasing with each passing mile. Most standard car insurance policies only compensate you for the total market value of the car. So if you’ve had an accident and totaled your car within six months of buying it, you will only receive the actual cash value of the car before the accident. This leaves you with a payout that’s lesser than the price you paid for the vehicle. Thus, you have no choice but to buy a cheaper car.

However, if you have new car replacement insurance, you can file a claim with your insurer and get a brand new car of the same make and model, minus your deductible. New car replacement insurance is an optional coverage that car insurance companies offer. However, many choose to skip it because the odds of totaling a new car are rather slim. So is it worth it? We’ll come to that in a bit.

Read: What is a deductible in the world of car insurance?

How does it work?

Typically, insurance companies only offer new car replacement coverage during the first year of car ownership. They would be foolish to offer it after the first year due to the toll depreciation takes on your car’s value after you’ve bought it.

Although each company’s new car replacement insurance policy is subject to change, you could expect your insurer to pay the verified purchase price of your totaled car, minus your deductible.

However, note that new car replacement insurance will not reimburse you for any equipment or components not installed by the manufacturer. That means you will not receive compensation for the new stereo you installed after buying the car.

But what makes new car replacement car insurance worth considering is that it does not take depreciation of your vehicle into account while calculating your compensation. Thus, you won’t lose money because your car’s value has dropped.

New car replacement insurance is something to think about if you have a brand-new car. New car replacement coverage can be a cost-effective way to maintain the value of your car. However, to get new car replacement insurance, your car must fulfill certain age and mileage restrictions, and you will be required to pay a deductible.

Read: Car insurance fraud: All you need to know to avoid being a victim

How much does it cost?

The price of new car replacement insurance differs depending on the insurer, the vehicle, and the driver. Most insurers disclose only a limited amount of information upfront, making it difficult to shop around and compare rates.

According to insurance experts, new car replacement insurance could increase the cost of an auto insurance policy by 5% to 10%. If you pay $1,500 per year for auto insurance, which is the national average, new car replacement insurance should cost $75 to $150 more per year, or $6 to $13 more each month. It is up to you to decide if the additional cost is worth it for the added peace of mind it offers.

New car replacement insurance rules

Each insurance provider has its own set of rules for new car replacement insurance. However, there are certain general guidelines:

Mileage limits: Your new car may only be eligible for new car insurance if it has fewer than 25,000 miles on it. Your vehicle may no longer be eligible for new car replacement insurance if it exceeds this mileage restriction.

Purchase window: Most insurers require you to purchase new car replacement insurance within 6 to 18 months of purchasing a new car. You may not qualify for this form of coverage after this window.

Gap insurance. Most insurers let you pick between new car replacement insurance and gap insurance. However, you can never get both types of coverage together. Gap insurance covers the gap between the amount owed on your car and the car’s value, whereas new car replacement insurance covers the cost of purchasing a new vehicle.

Read: Gap insurance: All you need to know

Not all insurers offer it: Some of the largest insurers in the country do not provide this form of coverage. Insurance companies that provide new automobile car insurance include Allstate, Erie, Farmers, Liberty Mutual, Nationwide, Travelers, and MetLife.

Is new car replacement insurance worth it?

If you’ve recently purchased a new vehicle, this form of coverage might be something to think about. Your car’s value drops significantly once you drive it off the lot. New car replacement insurance is a cost-effective solution to maintain your vehicle’s value even if it gets totaled.

You can examine your situation by comparing the current worth of your car on a site like Kelly Blue Book to find the purchase price and the current value of your car. If you don’t have new car replacement coverage, the difference between the two numbers is roughly the amount you’d be accountable for in the event of totaling your car.

Keep in mind that the period of coverage and mileage for this type of coverage varies depending on the insurance company. Liberty Mutual, for example, will replace a car that is less than a year old. Travelers, on the other hand, cover cars up to five years old.

New car replacement coverage may be worth considering if your brand new car is known to depreciate quickly. Luxury cars such as Maseratis and BMWs depreciate rapidly, while more affordable models such as the Honda CR-V and the Subaru Forester maintain their value over time.

Read: Top 10 most stolen vehicles and how it affects car insurance quotes

What’s the difference between new car replacement and gap insurance?

Gap insurance and new car replacement insurance work in a similar way. Let’s suppose your new car was involved in an accident. Gap insurance will pay the difference between the amount you owe and the car’s actual cash value.

If you paid $30,000 for your car and were involved in an accident, you still owe the lender $26,000. However, your insurer may only be willing to pay you $21,000 for your car. That means you still owe $5,000 to the lender. Gap insurance fills this void.

Most lenders require drivers to purchase gap insurance. Thus, if you lease or finance your vehicle., it may be included in your car insurance policy

If you don’t have either form of coverage, be sure you have enough cash on hand to reimburse the lender if your car is totaled.

Read: Catalytic convertor thefts: Most targetted cars listed

What’s the difference between new car replacement and better car replacement insurance?

Only a few insurers provide better car replacement insurance. Some insurers offer it as newer car replacement coverage. This form of coverage is available for both older vehicles and brand new cars. If you have this type of car insurance, you’ll get a better payout if you have a total loss claim.

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