New Car Replacement Insurance Explained

This is a guide to tell you about new car replacement insurance, which covers the remainder of your payments if a new car is declared a total loss.
Written by Carol Chung
Reviewed by Kathleen Flear
New car replacement insurance is an optional insurance add-on that can help you replace a recently-purchased car with a similar model if you total the original vehicle shortly after you buy it.
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.
If you totaled the car now, you'd still owe thousands of dollars on the loan, but your
car insurance
provider would only pay out a fraction of the value you left the lot with. To ensure you’re not stuck paying the difference, you can purchase new car replacement insurance.
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trusted car insurance comparison app
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New car replacement insurance: How does it 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.
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
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.
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
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.
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.
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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. Your lender may required you to purchase gap insurance for a financed vehicle.

Is new car replacement insurance worth it?

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. Consider doing so with car insurance broker app
so that you can find the best coverage at the most affordable rates.
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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
, State Farm,
, and
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
Plymouth Rock
The Hartford
The qualification requirements vary among these companies. For example, to get new car replacement insurance with
, 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.
, 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:
Car Model
Audi A6
Ford Fusion Hybrid
BMW 3 Series
Volvo S60
Mercedes-Benz E-Class
Lincoln MKZ
Infiniti Q50
BMW 4 Series
Infiniti QX60
Audi A4
What’s more, some car makes or brands are known to have a higher depreciation rate as well. According to data collected by, these are the 10 brands that depreciated the most in a five-year period:
Car Model
Land Rover

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.

Better car replacement coverage

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 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
, which gathers cheap car insurance quotes from over 55 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'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.
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