You’ve just bought a shiny new car and driven it off the lot. That new-car smell is wafting over you and you’re sitting back in a plush leather seat.
You may not realize it in the moment, but your brand-new car has actually depreciated in value by several hundred dollars already — maybe even by a few thousand. Cars generally lose over 10% of their value in the first month after purchase, and the depreciation only grows from there. After five years, the average car is worth just 40% of its purchase price.
In the event that your new car is totaled shortly after purchase, your insurer will take all that depreciation into account and pay out up to the car’s current value. That means you’ll be at a financial loss if you want to replace your car with a vehicle of a similar make and model.
To ensure you’re not stuck paying the difference, you can purchase new car replacement insurance. This form of add-on coverage will ensure that you receive enough money to buy a car of a similar make and model, minus your deductible.
Should you be on the hunt for a new car insurance quote? Here’s what you need to know.
How does new car replacement insurance work?
New car replacement insurance is an optional form of coverage. It’s usually only offered for cars that are a few years old or have a certain amount of mileage, though the eligibility requirements vary among insurance companies.
Leased cars don’t qualify for this kind of insurance. Neither do used cars, as most insurance companies will only allow you to purchase new car replacement coverage if you’re the first titleholder of a vehicle.
New car replacement coverage goes above and beyond standard coverage when you experience a total loss. A standard policy will protect you if you have collision and comprehensive coverage, but you’ll only receive a check for the depreciated value of your car (aka, the “actual cash value” of your car). With new car replacement insurance, you’ll be able to replace your totaled vehicle with a comparable car.
Here’s an example: you buy your car for $30,000. One year later, you get into a serious accident and the car is declared a total loss. New cars generally lose 20% of their value in the first year of ownership, which means your totaled car is worth $24,000.
If you don’t have new car replacement insurance, your insurance company will pay out about $24,000. But if you do have new car replacement coverage, you can expect to receive a payout closer to the original $30,000 purchase price.
How do insurance companies decide if your car is a total loss? Typically, a car is considered totaled if the cost to repair it exceeds its value. In some states, insurance companies must abide by specific laws that define when a car is totaled.
New car insurance rules and limitations
New car replacement insurance policies vary, but there are some common rules and limitations you need to know:
There are age and mileage requirements that must be met: Each insurance company has their own requirements, but generally speaking, new car replacement coverage is only available if your car is less than a few years old or if you’ve logged less than a certain number of miles (usually 15,000).
You need to have collision and comprehensive coverage: Many companies will allow you to purchase new car replacement insurance as an add-on coverage, as long as you also have collision and comprehensive insurance.
You have to pay a deductible: As with other car insurance coverage types, new car replacement insurance generally kicks in after you pay your deductible.
There are purchase windows for coverage: Insurance companies may impose a time limit for buying new car replacement coverage. For example, you may only be allowed to buy new car replacement insurance within a few months of purchasing your vehicle.
You can’t have new car replacement insurance and gap insurance simultaneously: As the name implies, gap insurance takes care of the “gap” between what you owe on a car and its value.
Do I need new car replacement insurance?
If you’ve recently purchased a new vehicle, you might be a good candidate for new car replacement insurance. Remember, your car will lose about 20% of its value in the first year alone after purchase. No one wants to think of their car being totaled, but if the worst happens, you can count on new car replacement insurance to provide you with a sufficient payout.
If you’re weighing whether or not to buy new car replacement insurance, here are some other factors to consider:
Your car: Some vehicles, like luxury cars and electric cars, depreciate more quickly than others. If you have a car that’s known to depreciate significantly over time, then you should strongly consider buying new car replacement insurance.
Your driving habits: If you have a long daily commute or if you frequently drive in times of high traffic, then you have a higher likelihood of getting into an accident and you may benefit from having new car replacement insurance.
Your finances: If buying a new car put a significant strain on your finances and you don’t have enough money readily available to buy a replacement vehicle, then new car replacement insurance might be a good idea.
How much does new car replacement insurance cost?
Generally speaking, new car replacement insurance costs around five percent of your total auto coverage. But don’t assume that this is a hard-and-fast number — the cost differs depending on the driver, the vehicle, and the insurance company.
If you luck out, you may find an insurance company that provides new car replacement insurance at no extra cost. Other companies may offer this form of coverage as part of a car insurance bundle.
If you want to know the exact amount you’ll pay, you’ll have to compare car insurance quotes.
Who offers new car replacement insurance?
New car replacement insurance isn’t available everywhere. It’s not offered in all states, and some big-name insurance companies like Geico, State Farm, USAA, and Progressive don’t offer it to their policyholders.
If you’re looking to buy new car replacement coverage, here are a few companies that do make it available:
- Horace Mann
- Liberty Mutual
- Plymouth Rock
- The Hartford
The qualification requirements vary among these companies. For example, to get new car replacement insurance with Farmers, your car has to be insured with the company when you buy it. It also has to be less than two years old or have mileage under 24,000 miles.
Travelers, on the other hand, offers new car replacement coverage in the first five years of car ownership. However, it won’t cover your car if it’s stolen or damaged by fire or flooding.
Vehicles with the highest depreciation
As mentioned above, some vehicles have a higher depreciation rate than others, especially luxury cars. According to Autoblog, these are the 10 models that depreciated the most in a three-year period:
- Audi A6: 55.8% depreciation
- Ford Fusion Hybrid: 54.9% depreciation
- BMW 3 Series: 53.4% depreciation
- Volvo S60: 53.2% depreciation
- Mercedes-Benz E-Class: 55.4% depreciation
- Lincoln MKZ: 51.8% depreciation
- Infiniti Q50: 51.8% depreciation
- BMW 4 Series: 51.7% depreciation
- Infinity QX60: 51% depreciation
- Audi A4: 51% depreciation
What’s more, some car makes or brands are known to have a higher depreciation rate as well. According to data collected by iSeeCars.com, these are the 10 brands that depreciated the most in a five-year period:
- Maserati: 69% depreciation
- Volvo: 66.4% depreciation
- BMW: 66.1% depreciation
- Audi: 64.6% depreciation
- Lincoln: 63.6% depreciation
- Infiniti: 63.3% depreciation
- Mercedes-Benz: 61.9% depreciation
- Land Rover: 61.4% depreciation
- Cadillac: 61.3% depreciation
- Buick: 61.2% depreciation
New car replacement vs. gap insurance
Gap insurance is short for “guaranteed asset protection.” On the surface, new car replacement insurance and gap insurance may seem interchangeable. But the key difference between these two coverages is that gap insurance doesn’t pay for you to buy a new car.
If your car is stolen or totaled in an accident, gap insurance covers the difference between what you owe on an auto loan or lease and what the insurance company pays out for your depreciated car.
So, let’s say you have a car with a depreciated value of $20,000 and you still owe $22,000 on it. If you have gap insurance, your insurance company will pay you the $2,000 difference between your loan amount and the car’s value. This will ensure that you can pay off the loan in full.
There are some other notable differences between these two coverage types. Gap insurance is easier to find than new car replacement insurance. While prominent companies like State Farm and Progressive don’t offer the latter, they do sell the former.
Furthermore, gap insurance is in effect for the length of your auto loan or lease. Conversely, new car replacement insurance is usually only available as long as your car remains below your insurance company’s age or mileage limit.
New car replacement vs. better car replacement
Some insurance companies, including Acuity, Erie, Hanover, and Liberty Mutual, offer better car replacement. This form of coverage can extend to cars of any age.
It provides similar coverage to new car replacement insurance, but as the name indicates, this type of coverage will offer you a better car in the event that your old vehicle is totaled. With Liberty Mutual, for example, better car replacement policyholders are offered a replacement vehicle that is one model year newer and has 15,000 fewer miles.
How to add new car replacement coverage to your car insurance policy
If your current car insurance company offers new car replacement insurance, then you may be able to buy it as an add-on coverage, which is a simple and straightforward process. Just contact your insurance company or agent to go through with your purchase. But bear in mind that you need to have both collision and comprehensive car insurance to purchase new car replacement insurance as an add-on.
If you can’t purchase new car replacement coverage from your existing insurer, then you’ll want to shop around for a new policy. The easiest way to do this is to gather car insurance quotes online.
If you don’t have collision and comprehensive coverage and carry only the state-mandated minimum liability coverage, then you’ll need to shop for policies that include collision, comprehensive, and new car replacement insurance.
To find the most competitive policy, you could visit the website of each insurance company that offers new car replacement coverage and get a quote, but this can be very time-consuming, to say the least.
It makes more sense to use an online insurance comparison tool like Jerry.ai, which gathers cheap car insurance quotes from up to 45 companies. If you want to switch to a more affordable policy that offers the exact coverage you’re looking for, all you have to do is click a button.
Jerry.ai’s insurance experts will take it from there. They’ll handle the paperwork to set up your new policy and cancel your old one for you. They’ll even get you a refund for the unused part of your old policy.
If you do go ahead and buy new car replacement insurance, be sure to cancel it once your vehicle exceeds your insurer’s stated age or mileage limit. If you forget to do this, then you could be charged for coverage you can’t use.