New Car Replacement Insurance: What to Know

New car replacement can be expensive and has some limitations to look out for.

Theresa Stevens
Theresa Stevens
  • AFCPE Accredited Financial Counselor

  • 6 years experience in the personal financial industry

Theresa is a writer and former financial advisor with experience helping clients solve money challenges. She uses her expertise to clarify complex personal finance concepts.


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Danny Smith
Edited byDanny Smith
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Danny Smith
  • Licensed auto and home insurance agent

  • 4+ years in content creation and marketing

As Insurify’s home and pet insurance editor, Danny also specializes in auto insurance. His goal is to help consumers navigate the complex world of insurance buying.

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Updated April 18, 2024

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If you total your new car, your insurance payout might not be enough to replace the vehicle. That’s where new car replacement insurance comes in.

New car replacement insurance pays to replace your totaled vehicle with a car of the same make and model or a comparable model if the exact one is unavailable. However, not all insurers offer this coverage, and you must meet specific requirements to qualify for it.

Here’s what you need to know about new car replacement insurance.

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What is new car replacement insurance?

New car replacement insurance covers the cost of replacing your vehicle if you’re involved in an accident where your car is deemed a total loss. It’ll pay for a new vehicle of the same make and model, minus your deductible.

It’s typically an optional add-on to your insurance policy and may have specific conditions and requirements. For example, you may need comprehensive and collision coverages to be eligible. You’ll need to check with each insurer for eligibility information.

Gap insurance vs. new car replacement insurance

New car replacement insurance and gap insurance are not the same types of coverage. 

Gap insurance can cover the difference between how much you owe on a car loan and the amount of your collision or comprehensive coverage payout. A gap payout will help you pay off your car loan, but it will not help you buy a replacement vehicle

Check Out: Car Insurance Quotes for New Cars

Check Out: Car Insurance Quotes for New Cars

Do you need new car replacement insurance?

It depends on how quickly your vehicle depreciates. A car’s depreciation rate depends on its year, make, and model. Most new cars lose about 20% of their value in the first year of ownership and 60% within the first five years, according to Kelley Blue Book.[1]

The primary benefit of new car replacement insurance is receiving a brand-new vehicle of the same make and model if you total your vehicle. If you have an older vehicle, new car replacement insurance probably isn’t a good idea since most of your car’s depreciation has already occurred.

Factors to consider

  • Replacement cost: If the cost of replacing your vehicle with a vehicle of the same make and model would pose a financial burden, new car replacement insurance can be valuable.

  • Age of your vehicle: New car replacement insurance is typically only available for vehicles a few years old or newer. Insurers often have different vehicle age and mileage limits.

  • Affordability: New car replacement coverage will increase your insurance premium. Determining if the potential benefits are worth the additional cost is up to you. Make sure you still have enough money to pay your deductible.

  • Depreciation concerns: New vehicles experience significant depreciation in the first few years. New car replacement insurance can help limit the financial impact of depreciation if you have to file a claim.

Cost-benefit analysis

It’s important to weigh the benefits of new car replacement insurance against the increased costs. If the amount of premium increase is less than the amount you stand to lose if your car is totaled, new car replacement coverage could be a good investment.

For example, let’s say you add new car replacement coverage to your auto policy for an extra $100 a year. You crash your new vehicle with an actual value of $20,000 and a replacement cost of $25,000.

With a standard car insurance policy, you’ll get a check for $20,000 minus your deductible. That means if you wanted to buy the same car, you’d have to come up with $5,000 on your own. But if you have new car replacement insurance, you’ll receive $25,000 minus your deductible. In this case, the benefits outweigh the costs since you paid $100 to save $5,000.

Read More: The 10 Best and Worst Car Insurance Comparison Sites

Read More: The 10 Best and Worst Car Insurance Comparison Sites

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How new car replacement insurance works

New cars lose value quickly, especially in the first few years of ownership. If you total your vehicle soon after buying it, you may get less than you expect from your regular car insurance payout. This is because car insurance companies calculate payouts based on the actual cash value of your vehicle, which is typically lower than the replacement value.[2]

But if you have new car replacement coverage, your insurance company will reimburse you for the cost of a comparable vehicle rather than your car’s actual cash value.

Some insurers only allow you to buy new car replacement coverage when you purchase the vehicle, while others will let you add it to your policy later. It’s best to buy coverage sooner rather than later to reduce the window of time your investment in your new car is vulnerable.

Coverage and limitations of new car replacement insurance

Eligibility for new car replacement insurance varies depending on the insurance company and your policy. However, some common factors that affect your eligibility include whether you own or lease your vehicle and its age, type, price, and mileage. And some companies will only insure you if you’re the vehicle’s first owner.

Here are a few examples of what new car replacement insurance covers:

  • Vehicle replacement: As the name suggests, new car replacement insurance covers the cost of replacing your vehicle with a vehicle of the same make and model. You’ll still need to pay your deductible, however.

  • Gap insurance: Some new car replacement insurance policies include gap insurance, such as Premier New Car Replacement coverage from Travelers.

Where to get new car replacement insurance

New car replacement insurance is relatively easy to find, but some insurers don’t offer it. If a company offers new car replacement insurance, you’ll want to confirm it’s available in your state.

You should get quotes from various insurance companies to compare coverage and premiums before buying a new car replacement insurance policy.

Insurance CompanyDetails
SafecoSafeco covers the replacement cost of vehicles less than a year old with fewer than 15,000 miles and no previous owners.
Liberty MutualLiberty Mutual offers new car replacement coverage for vehicles less than a year old with fewer than 15,000 miles.
AllstateAllstate offers new car replacement coverage for vehicles less than 2 years old.
TravelersTravelers’ Premier New Car Replacement coverage will pay to replace your car if you total it within the first five years of ownership. It also includes gap insurance and a lower glass deductible.
FarmersFarmers covers the cost of replacing a new vehicle under 2 years old and with fewer than 24,000 miles.

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Alternatives to new car replacement insurance

Not all insurance companies offer new car replacement insurance, but other types of coverages might help mitigate the financial burden of a total loss. Here are a few to consider:

Gap insurance

Gap insurance exists to bridge the “gap” between the remaining balance on your car loan (or lease) and the actual cash value of your vehicle at the time of a loss. If you total your vehicle, gap insurance will pay off your car loan or lease, so you’re not on the hook for payments on a car you no longer have.

Here are examples of when to consider purchasing gap insurance:

  • You made a down payment of less than 20% on your vehicle.

  • You financed your vehicle for 60 months or longer.

  • You lease your vehicle.

  • Your vehicle depreciates faster than average.

  • You rolled over negative equity from an old car loan into your new loan.[3]

Extended warranties

An extended warranty won’t cover the cost of replacing a totaled vehicle, but it can help manage the costs of repairing your car so you can continue driving it. It’s always important to read the terms and conditions of any warranty — some have deductibles.

New car replacement insurance FAQs

New car replacement insurance can be difficult to navigate. Below, you’ll find answers to some commonly asked questions about this coverage.

  • Does your car qualify for new car replacement insurance?

    Your car will typically qualify for new car replacement insurance if your vehicle is less than 2 years old and has fewer than 15,000 miles. Some companies only offer this coverage if you carry collision and comprehensive coverage. It’s important to check with your insurer, as eligibility requirements vary by company and state.

  • How does your insurance company pay for the total loss of a brand-new car?

    Without new car replacement insurance, your insurance company will cover the actual cash value of your vehicle, minus your deductible, in the event of a total loss. Actual cash value is the amount your car was worth immediately before the loss, and it takes depreciation into account.

Sources

  1. Kelley Blue Book. "How to Beat Car Depreciation."
  2. Kelley Blue Book. "Actual Cash Value: How It Works for Car Insurance."
  3. Insurance Information Institute. "What is gap insurance?."
Theresa Stevens
Theresa Stevens

Theresa Stevens is a personal finance writer based in Boston, Massachusetts. Her work has been featured in Forbes Advisor, Bankrate, and more. As a former financial advisor, she has first-hand experience helping people solve their money challenges. When she's not writing, you'll find her trying out new karaoke spots or planning her next trip abroad.

Danny Smith
Edited byDanny Smith
Photo of an Insurify author
Danny Smith
  • Licensed auto and home insurance agent

  • 4+ years in content creation and marketing

As Insurify’s home and pet insurance editor, Danny also specializes in auto insurance. His goal is to help consumers navigate the complex world of insurance buying.

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Compare Car Insurance Quotes Instantly

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