How does new car replacement insurance work? Is new car replacement insurance worth it? Today, we’re answering all your questions about new car replacement insurance, including whether or not it’s worth the price.
What is New Car Replacement Insurance?
New car replacement insurance is an optional car insurance policy that is only available on new vehicles.
With new car replacement insurance, your car insurance company will buy you a new car if your current car gets totaled.
Typically, new car replacement insurance has specific requirements. Here’s how Liberty Mutual defines their new car replacement insurance, for example:
“If your totaled car is under one year old and has less than 15,000 miles, New Car Replacement is an optional coverage.”
Other companies restrict new car replacement insurance to vehicles that are two years old or newer with fewer than 25,000 miles.
Typically, your car insurance company will pay you the replacement value of your vehicle. If your vehicle is totaled after an accident, then your car insurance company will usually write you a check for the replacement value of your vehicle.
With new car replacement insurance, your car insurance company won’t cut you a check just for the replacement value of your vehicle; instead, your car insurance company will buy you a brand new vehicle (or, in most situations, they’ll cut you a check that lets you buy a new vehicle).
Benefits of New Car Replacement Insurance
The main benefits of new car replacement insurance include:
- You get a replacement car that’s the same model year as your totaled car
- You get better peace of mind from having a better car insurance policy
- You don’t have to worry about replacing your totaled car with an older model of lesser value
Better Car Replacement Versus New Car Replacement
Some car insurance companies offer two similar policies, including better car replacement and new car replacement. These policies are similar, but you’ll be compensated in different ways.
Better Car Replacement: If your vehicle is totaled after a collision, then you’ll receive a newer model year vehicle than the vehicle that was totaled. If your 2017 Honda Civic is totaled, for example, then you might receive a 2018 Honda Civic. Most car insurance companies in the United States will buy you a vehicle that is one model year newer than your totaled vehicle under better car replacement coverage.
New Car Replacement: With new car replacement, the car insurance company will buy you a new car after your current vehicle is totaled. Your new car will be the same model year as your totaled car.
Downsides of New Car Replacement Insurance
New car replacement insurance sounds like a great idea: you’re guaranteed to get a new vehicle if your current vehicle gets totaled.
Obviously, there are going to be downsides. Here are some of the downsides of new car replacement insurance:
- It costs extra
- It applies only to newer vehicles (most car insurance companies require your vehicle to be 2 years old or newer, for example, and have fewer than 15,000 or 25,000 miles)
- It’s only available if you’re buying full coverage insurance (i.e. collision and comprehensive insurance)
- You will still pay a deductible when making a claim
Essentially, new car replacement insurance gives you added peace of mind when you’re driving a newer vehicle. You pay 2% to 5% higher insurance premiums in exchange for getting a guaranteed new or better car after a collision.
Consider New Car Replacement Insurance If You’re Worried About Depreciation on a New Vehicle
One reason to consider new car replacement insurance is when buying a new vehicle. If you’re buying a brand new vehicle, then the value of that vehicle plummets as soon as you drive it off the lot.
Let’s say you bought a new Ford F-150. After one year, your Ford 1-50 is worth around 70% of the price you paid. Your truck lost thousands of dollars of value the moment you drove it off the lot.
That’s not a problem if you’re planning to keep the truck long-term.
It is a problem, however, if you get into an accident in your new vehicle. Your car insurance company will cover the replacement cost of your vehicle.
Let’s say you just bought a $50,000 truck brand new. You drive it off the lot, then get into an accident on the way home. You just paid $50,000 for the truck an hour ago, but the truck was worth only $45,000 the moment you drove it off the lot. Your car insurance company sends you a check for $45,000, even though you paid $50,000 for the truck.
This is an extreme example, but it’s one example of why new car replacement insurance may be a good idea.
Ultimately, new car replacement insurance reimburses you for the cost of a new vehicle of the same make and model, minus the deductible, if your car is declared a total loss. Typically, this optional car insurance policy is only available on brand new cars (cars that are one or two years old). It’s also only offered by specific insurance companies.
At the time of writing, only Allstate, Farmers, Liberty Mutual, Nationwide, and Travelers offer new car replacement insurance out of the major car insurance companies. Some of these companies also offer better car replacement, which works in a similar way but replaces your totaled vehicle with a newer vehicle.
If you’re interested in new car replacement insurance, then contact your car insurance company. Or, compare quotes online today to find the best prices on new car replacement insurance.