New Car Replacement Insurance: Everything You Need to Know

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Written by Eric Schad Edited by Nick Versaw Reviewed by Amanda Clear

Updated March 13, 2023

Key Takeaways

• New car replacement insurance covers the cost of a new vehicle of the same make and model, minus the deductible, if your car is deemed a total loss.
• The coverage is typically only available on cars less than two years old and may have a mileage requirement.
• The cost of adding new car replacement insurance to your policy is generally around 5% of your total premium.

Totaling a car is every driver’s worst nightmare. When you total your car, and you’re at fault, your insurance company deems it a loss and pays you what’s called the actual cash value — or ACV — for your car, regardless of whether it covers the remaining balance on your car loan (unless you have gap insurance).

Unfortunately, the minute you drive your car off the lot, the value drops sharply — often between 10-20%. This means the ACV you receive could be hundreds or even thousands of dollars less than what you paid for your car.

And that’s just what new car replacement insurance intends to save you from. With this add-on auto insurance policy in place, you won’t bear the brunt of the accident, effectively saving your wallet and your mind in the process.

What is New Car Replacement Insurance?

New car replacement insurance ensures that your insurance company covers the cost of a brand-new vehicle of the same make and model, minus your deductible.

To put things in perspective, imagine buying a brand-new car for $40,000. A few months later, the depreciated value drops to $36,000. One day, you’re driving and strike another vehicle. Suddenly, you have a totaled car that’s worth far less than the ACV.

Without new car replacement coverage, your insurance company will only award you the actual cash value of $36,000. With this special coverage in place, you’ll get the value to purchase a new car of the same make and model — likely the full $40,000.

Keep in mind that this doesn’t necessarily mean that you’ll get the same model year. If your car was a year and a half old at the time of the incident, you wouldn’t get the same vehicle. Instead, you would get the latest model.

How Much Does New Car Replacement Coverage Cost?

Like other types of car insurance coverage, new car replacement insurance costs vary. As a general rule, expect to pay about 5% of your total premium to add new car replacement coverage to your policy.

For example, if you get a car insurance quote for $1,200 a year based on the coverage you need, new car replacement insurance will set you back an additional $60. However, this will vary based on your car insurance provider. 

If you choose this coverage, you’ll also have to pay a deductible that you choose when you purchase the insurance — often between $500 and $1,000.

The Fine Print of New Car Replacement Insurance

While new car replacement coverage sounds like a great deal overall, it also has a few stipulations and eligibility requirements:

1. There is a purchase window. Insurance companies may have a window of time for you to add this coverage. Some companies may require you to purchase it within six months of purchasing your vehicle, while others may close the purchase window within the first year of ownership.
2. Your vehicle has to meet certain requirements. This type of insurance is typically only available on cars less than two years old, and some insurance companies may also have a mileage requirement. Some insurers may have looser requirements, so inquiring about eligibility is recommended.
3. You need to have collision coverage and comprehensive coverage first. If your insurance company offers new car replacement coverage, you must have both collision and comprehensive insurance. But lenders require collision and comprehensive coverage if you have a car loan, so these types of coverages aren’t necessarily an extra cost.
4. Remember your deductible. Every new car replacement insurance policy has a deductible, which is the amount you must pay before your insurer pays you. If your deductible is $500 and the purchase price of your car was $40,000, you receive a payout of $39,500 toward the purchase of a new vehicle.

What Companies Offer New Car Replacement Insurance?

Although not every car insurance company offers new car replacement insurance, most have added it to their offerings. You can find this coverage at companies such as:

• Liberty Mutual
• Allstate
• Erie
• Nationwide
• MetLife
• Travelers
• The Hartford
• Progressive

Remember that every insurer has different rules, eligibility requirements, and stipulations regarding what cars are eligible for this car insurance policy. Reach out to an insurance agent prior to buying an auto policy to make sure your car meets the requirements.

Do I Need New Car Replacement Coverage?

Whether you need new car replacement coverage is entirely subjective. But even if you have full coverage, new car replacement coverage can give you peace of mind and protect you from the perils of depreciation and financial hardship.

If you’ve recently purchased a new vehicle, consider these questions to ultimately guide you to the right decision:

• Can I afford a new vehicle if my car is a total loss in an accident?
• Is the additional insurance cost suitable for my budget?
• Have I been in an at-fault accident in the past?
• Am I willing to risk the loss in depreciation?

By honestly answering these questions, you can come to a satisfactory conclusion about whether new car replacement insurance is the right coverage option for your needs.

What is Better Car Replacement Insurance?

If you can’t afford new car replacement coverage or your car doesn’t fit eligibility requirements, better car replacement insurance could be the answer. Offered by many major insurers, better car replacement insurance provides a newer model vehicle if you total your vehicle.

While this type of coverage doesn’t give you a brand-new car, insurers will provide you with a newer vehicle. This means that you can effectively get a car with fewer miles and a lower amount of depreciation when replacing the totaled vehicle — and all at no additional cost to you aside from a deductible.

New Car Replacement vs. Gap Insurance

Although gap insurance and new car replacement coverage may seem similar, learning the difference between them could help you when you need it the most.

An acronym for guaranteed asset protection, gap coverage pays the difference between the actual cash value of your vehicle and the amount left on your lease or loan if your car is totaled. So if the purchase price of your car was $20,000 but the value of the car at the time of the accident is $16,000, gap insurance pays the $4,000 shortfall.

The difference is that gap insurance pays off the loan but gives you nothing to put toward a new car, while new car replacement guarantees that you get a new vehicle without paying anything out of pocket.

If you’re unsure which type of insurance is right for you, take some time to sit down and compare the terms. Some drivers are better suited for one type of coverage, so get quotes from your insurance company and weigh out all your options.

Eric Schad Insurance Writer

Eric Schad has been an expert content writer for nearly a decade. Before getting behind the keyboard, he worked in the finance and music industries. With eight years of writing experience in the automotive and insurance industries, he enjoys communicating information that makes shopping for car insurance a breeze. Away from the computer, Schad is a blues guitar shredder, crazed sports fan, and always down for a spontaneous trip anywhere around the globe.