What Is a Replacement Cost Policy?
Last Updated on March 15, 2021
Replacement cost car insurance policies may make it easier to buy a vehicle after an insurance claim.
With a replacement cost policy, your insurer will cover the cost of replacing your vehicle after an accident – not just the actual cash value of your vehicle.
Typically, when we talk about replacement cost policies, we’re talking about home insurance – not car insurance. In the car insurance world, we typically say “new car replacement insurance” instead of “replacement cost policy”.
Today, we’re explaining everything you need to know about replacement cost policies, actual cash value policies, new car replacement insurance, and other car insurance compensation options.
What is New Car Replacement Insurance?
New car replacement insurance, also known as a replacement cost policy, is a car insurance option offered by some insurers, but not others.
With new car replacement insurance, your insurer will compensate you for the real cost of replacing your vehicle after an accident.
You may be thinking: “Wait a minute. I thought ordinary car insurance compensated me for the value of my vehicle after an accident.”
That’s true. However, insurers use something called actual cash value to determine the value of your vehicle. The actual cash value of your vehicle may be much less than the cost of replacing your vehicle.
New Car Replacement Insurance: An Example
Confused? That’s okay. Let’s use an example.
Let’s say your car is stolen or totaled in an accident. Comprehensive and collision insurance, both of which are required if you’re leasing or financing your vehicle, will pay out up to the car’s value, minus your deductible.
However, because new vehicles lose value quickly, the check you receive will be less than what you paid for your vehicle.
The actual cash value of your 1-year old truck, for example, might be $40,000. This is the value of your truck minus depreciation. However, you paid $55,000 for your truck just one year ago.
You now have $40,000 from your insurance company and no truck. If you wanted to buy a truck like the one you just drove, it might cost $48,000.
With new car replacement insurance, your insurer compensates you for the cost of replacing your vehicle with an equivalent vehicle. In this situation, you would receive $48,000 instead of $40,000.
Actual Cash Value Versus Replacement Value
Most insurance policies use the actual cash value of your vehicle to calculate insurance payout. If your car is destroyed after an accident, then you will receive compensation for the actual cash value of your vehicle, which is always less than the replacement value:
Actual Cash Value (ACV): Insurers calculate ACV by taking the value of your vehicle and subtracting depreciation.
Replacement Value: This is the current price of your vehicle if you were to buy a new vehicle today.
Most replacement cost value policies only cover vehicles within the first 1-2 model years. After that, you can no longer buy replacement cost insurance for that vehicle.
If your vehicle is declared a total loss within the first two years of ownership, and you have replacement cost insurance, then you should receive enough compensation to buy a new vehicle from the dealership.
Who Offers New Car Replacement Insurance?
Many of America’s largest insurance companies do not offer new car replacement insurance. GEICO, Progressive, and USAA, for example, do not offer new car replacement insurance.
Even if a company does offer new car replacement insurance, that company may not offer it in all states.
Plus, specific new car replacement insurance requirements vary between companies. Some companies require the vehicle to be two model years old or newer, for example, while other companies only cover vehicles during the first 15,000 miles of driving.
Some of the biggest insurance companies that offer new car replacement insurance include Allstate, American Family, Ameriprise, Cincinnati, Erie, Farmers, Farm Bureau, Hanover, The Hartford, Liberty Mutual, MetLife, Safeco, and Travelers.
Some of the smaller or regional insurers that offer new car replacement insurance include Acuity, Allied, Concord Group, Nodak, Penn National, Plymouth Rock, and Shelter.
How Does New Car Replacement Insurance Work?
New car replacement insurance typically:
- Costs extra
- Only applies to newer vehicles
- Is available only if you buy collision and comprehensive coverage
- Is only available through some insurers
How Much Does New Car Replacement Insurance Cost?
New car replacement insurance rules and prices vary between insurers.
Generally, however, new car replacement insurance adds about 5% to 10% to the price of your policy.
If you currently pay $1,200 per year for car insurance, then you might pay an extra $60 to $120 for new car replacement coverage.
Some insurers, including Concord Group and Shelter, add new car replacement coverage at no extra cost.
Other insurers bundle new car replacement coverage with a package of other premium upgrades.
Request a quote from an insurance company today to get an accurate idea of how much new car replacement insurance will cost you.
How Much Extra Do I Get with New Car Replacement Insurance?
Up above, we talked about the difference between actual cash value and replacement value.
New cars depreciate quickly. Your car loses 25 to 50% of its value within the first year of ownership. You may have paid $30,000 for your new car, but your new vehicle may only be worth $20,000 after 14 months of ownership.
Vehicle depreciation stops plummeting in the second and third years of ownership, although it continues to drop with age. The first year, however, is where new car drivers really get hit.
So how much more money can you get with new car replacement insurance? Let’s use the same math above: you bought a $30,000 vehicle and got into an accident after 14 months of ownership. The actual cash value of your vehicle is $20,000, and your insurer gives you a check for $20,000, minus depreciation. With new car replacement insurance, you won’t receive $30,000 because your vehicle is not currently worth $30,000. Instead, dealerships may be selling your vehicle – which is now from the previous model year – for around $27,000. You will receive a check for $27,000 instead of $20,000.
Final Word on Replacement Cost Policies
Ultimately, if your insurer offers new car replacement insurance, and you want added peace of mind on your brand new vehicle, then a replacement cost insurance policy may be worth it. It only adds 5-10% to your premiums, but it can make a big difference if you need to make a claim.
