New Car Replacement Insurance Explained: Should You Buy It?

Last Updated on September 30, 2023

New car replacement insurance seems confusing. We’re here to clarify it.

New car replacement insurance covers the cost of replacing a new car after an accident. Because new vehicles depreciate quickly in value, new car replacement insurance can protect your vehicle and ease financial pain after an accident.

Is new car replacement insurance worth it? Should you buy new car replacement insurance? Keep reading to discover everything you need to know about new car replacement insurance and how it works.

What Is New Car Replacement Insurance?

New car replacement insurance is an optional insurance policy available through some insurers on qualifying vehicles.

With new car replacement insurance, your insurer pays for a brand new car of the same make and model, minus your deductible, if your new car is declared a total loss after a covered incident.

If you get into a serious accident with your new vehicle, then you can make a claim through your new car replacement insurance and receive a brand new vehicle of the same make and model. Without new car replacement insurance, your insurer would compensate you for the actual cash value of your vehicle, which is typically much lower than the cost of buying the same vehicle new from the dealership.

New Car Replacement Insurance: The Basics

New car replacement insurance is the right choice for some drivers but not others. Here are the basics for how new car replacement insurance works:

• It costs extra
• It applies only to newer cars (say, cars with a certain number of miles or that are newer than 18 months old)
• It’s only available if you already carry full coverage car insurance (which includes collision and comprehensive coverage)
• It’s not offered by all insurers
• If your vehicle does not qualify for new car replacement insurance, then it may qualify for better car or newer car replacement insurance

If your insurer offers new car replacement insurance, and if your vehicle qualifies for coverage, then it may be worth considering. If you get into an accident with your new car, then new car replacement insurance can quickly pay for itself.

However, there are multiple things to consider when deciding whether or not new car replacement insurance is worth it.

How Much Does New Car Replacement Insurance Cost?

The cost of new car replacement insurance varies between insurers, vehicles, and drivers. Most insurers provide limited pricing information upfront, making it difficult to compare quotes.

However, insurance experts claim new car replacement insurance should add 5% to 10% to the cost of an auto insurance policy. If you pay around $1,500 per year for car insurance, which is the average amount nationwide, then new car replacement insurance should cost $75 to $150 extra per year, or around $6 to $13 per month. Some drivers are willing to pay that amount for added peace of mind and coverage. Others are not.

Rules for New Car Replacement Insurance

Each insurance company has its own rules for new car replacement insurance. Rules vary between insurers. However, common rules include:

• Mileage Limits:  Your car may only qualify for new car replacement insurance if it has, say, fewer than 25,000 miles on it. Once your car exceeds this mileage limit, it may no longer qualify for new car replacement insurance.
• Purchase Window Limits: Most insurers require you to buy new car replacement insurance within 6 to 18 months of buying a new car. If you don’t buy new car replacement insurance within the 6 to 18 month window, then you might not qualify.
• Cannot Combine It With Gap Insurance: Most insurers let you choose new car replacement insurance or gap insurance – but not both. Gap insurance covers the difference between your car loan and the value of your vehicle, while new car replacement insurance covers the cost of buying a new car.
• Not Offered by All Insurance Companies: Some of the nation’s largest insurance companies do not offer new car replacement insurance. Allstate, Erie, Farmers, Liberty Mutual, Nationwide, Travelers, and MetLife are some of the largest insurance companies that offer new car replacement insurance.

How Claims Work with New Car Replacement Insurance

When you have new car replacement insurance, claims work differently. If you have a total loss insurance claim, then you can receive significantly more for your claim than you would if you did not carry new car replacement insurance.

Let’s say your 2022 Honda Civic is involved in an accident six weeks after you bought the car for $25,000.  It would cost $35,000 to repair the damage, which is more than the vehicle is worth. At this point, your insurer declares your car a total loss. The cost of repairing the vehicle is more than the vehicle is worth.

If you have ordinary collision coverage, then your insurer will cover the actual cash value of the vehicle. This amount includes depreciation. Although you paid $25,000 for the vehicle, the value of the vehicle dropped significantly when you drove it off the lot – and drove it for the next six weeks. Because of that, your insurer is only willing to pay you $19,000 for your Honda Civic – even though you just paid $25,000 for the vehicle.

If you had new car replacement coverage, however, then things would work differently. Your insurer would cover the cost of buying a brand new 2022 Honda Civic. Instead of receiving $19,000 for your total loss insurance claim, you would receive the amount required to buy a new car of the same make and model, or roughly $25,000.

In this situation, you came out ahead by buying new car replacement insurance. However, new car replacement insurance may or may not be worth it, depending on your budget and aversion to risk.

Is New Car Replacement Insurance Worth It?

New car replacement insurance may or may not be worth it, depending on your situation. Here are some factors to consider when determining whether or not to buy new car replacement insurance:

• The Plummeting Value of New Cars: You’ve probably heard that the value of a new car plummets the moment you drive it off the lot.  That’s true. After one year of driving, the average car has dropped 20% to 30% in value. You might have paid $40,000 for your Ford F-150 in August 2022. By August 2023, however, that truck may only be worth around $28,000.
• Average Depreciation for your Car: Some cars lose value quickly and rapidly. Others hold their value well. The average vehicle drops 50% in value over a five-year period. Some vehicles, including high-end sports cars, trucks, and certain electric vehicles, drop more rapidly in value, losing 60% to 70% of their value within the first five years. Other vehicles hold their value well. The faster a vehicle depreciates, the more you will lose by skipping new car replacement insurance.
• Risk Aversion: On older vehicles, it’s easy to get into a total loss accident. Your car isn’t worth much, so even a small accident can total the vehicle. On newer vehicles, the accident needs to be larger for a total loss insurance claim. Chances are slim that you’ll need to make a new car replacement insurance claim. It’s up to you to decide how much risk you want to take.
• Driving Habits: Do you have multiple decades of safe, defensive driving experience? Your chances of getting into an accident are low. Do you have multiple at-fault accidents within the last few years? Your chances of an accident are higher, which means new car replacement insurance may be worth it.

New Car Replacement Vs. Better Car Replacement Insurance

A small number of insurers offer better car replacement insurance, which works differently than new car replacement insurance.

Also known as newer car replacement, better car replacement insurance is available on older vehicles – not just brand new vehicles. You pay extra for car insurance, then receive a higher insurance payout in the event of a total loss insurance claim.

Better car replacement insurance varies between insurers. Liberty Mutual’s better car replacement insurance, for example, pays for the value of a car that’s one model year newer and has 15,000 fewer miles than your totaled vehicle. You can buy this coverage for cars of any age.

New Car Replacement Vs. Gap Insurance

New car replacement insurance works similarly to gap insurance. If your new vehicle is involved in an accident, then gap insurance can cover the ‘gap’ between the amount you owe for the vehicle and the actual value of your vehicle.

If you recently paid $30,000 for your car, for example, and got into an accident, then you might still $26,000 on your auto loan. However, the insurer is only willing to give you $21,000 for your vehicle. You still owe $5,000 on your vehicle. Gap insurance is designed to cover this gap.

Many lenders require gap insurance on new vehicles. If you are leasing or financing your vehicle, then gap insurance may be built into your loan payments.

If you do not have gap insurance or new car replacement insurance, then be sure you have enough savings to repay the lender in the event of a total loss insurance claim.

Final Word on New Car Replacement Insurance

New car replacement insurance may or may not be worth it, depending on the way your vehicle depreciates and your personal aversion to risk.

If you need to make a total loss insurance claim on your new vehicle, then new car replacement insurance will quickly pay for itself. Some drivers are also willing to pay extra for peace of mind.

At 5% to 10% extra per year, new car replacement insurance is a small added expense that may be worth it. However, it’s not available on all vehicles, nor is it offered by all insurers. Contact your insurer to see if your new vehicle qualifies for new car replacement insurance.