Buying a new car is a significant investment of your financial resources. The last thing you want is to pay out again if your car is totaled in the first year or so of ownership. For drivers in this situation, a type of insurance called new car replacement coverage can help you get behind the wheel of a new car with limited financial repercussions. Is new car replacement insurance worth it? Bankrate’s insurance editorial team took a close look at what new car insurance is and how it might benefit you as the owner of a new car.

What is new car replacement insurance?

New car replacement insurance is optional coverage you can purchase on top of the liability insurance your state mandates.

Usually, new car replacement insurance is only allowed if your car is less than a couple of years old or has under a certain amount of mileage (often 15,000, or roughly the average mileage that most people drive in a year). Some insurers also require you to carry collision and comprehensive coverage to have new car replacement insurance.

This add-on generally costs about 5 percent of the amount of your total coverage, so if your policy costs $1,000 a year, the new car coverage portion may add about $50.

Normally, your insurance would pay you the depreciated amount of your car if it’s totaled or stolen, but with new car replacement coverage, your payout will account for the value of a brand new version of your same make and model. It should be enough for you to purchase the exact same car as the one you lost.

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How does new car replacement insurance work?

Let’s say you bought a new 2020 Honda Accord for $29,000. You purchase new car replacement insurance. Six months later, you are T-boned at an intersection, and the insurance adjuster declares your car totaled.

If you did not have new car replacement insurance, you would receive the depreciated market value for the car, which may be roughly $24,000 (minus your deductible). With your new car replacement coverage, however, you’ll receive a check closer to the $29k (again, minus your deductible) you paid for the car — enough to purchase another 2020 Honda Accord.

Things to know about new car replacement insurance

If you are considering new car replacement or even if you are already covered under this add-on, the following conditions still apply and could potentially make you ineligible if you do not meet them.

  • You must have full coverage insurance: New car replacement is an optional feature that requires you to already have collision and comprehensive coverages in your policy. You cannot purchase new car replacement coverage with only minimum liability insurance.
  • Vehicle age and mileage restrictions: New car replacement insurance typically applies to cars under a year old with less than 15,000 mileage. If your vehicle is totaled past this time, you are no longer covered by this feature.
  • Better car replacement vs. new car replacement: Some insurers offer better car replacement insurance, which compensates for your loss with a car that is one year newer and with 15,000 miles less. This is not to be confused with new car replacement, which gives you the payout to buy the same make and model that you used to own.
  • You still have to pay a deductible: Even if your payout is for most of the coverage amount, you still have to pay the deductible before your claim is settled by the company. This requires you to have enough money in savings to be able to bear the cost.

Where to buy new car replacement insurance

If this type of coverage looks appealing to you, you are likely wondering what insurance companies offer new car replacement insurance. Not all of them do, but the following insurers may be worth considering if you are interested in this endorsement.

  • Allstate: Allstate covers cars two years old or less.
  • Ameriprise: You can get new car replacement coverage within the first year of ownership or less than 15,000 miles.
  • American Family: This coverage is only available for brand new vehicles and is removed after the first renewal of a policy.
  • Erie: This provider covers cars less than two years old; if you’ve had the car longer than two years, Erie pays the cost to replace it with a comparable model that’s two years younger.
  • Farmers: Farmers covers cars within the first two years or 24,000 miles.
  • Nationwide: Nationwide’s new car replacement is only available in some states.
  • The Hartford: This provider covers cars for the first 15 months or 15,000 miles, whichever comes first.
  • Liberty Mutual: You can get this coverage within the first year and less than 15,000 miles.
  • Travelers: This covers cars within the first five years for the original owner. It also includes gap coverage.

Several major companies, including Geico and State Farm, do not offer new car replacement.

New car replacement insurance vs. gap insurance

Although gap insurance is similar, these coverage types are not the same thing and generally you’ll pay separately for each of them. Learn the difference between new car replacement insurance vs. gap insurance.

Gap insurance is short for “guaranteed asset protection.” It doesn’t pay for you to purchase a new car, but it does provide you with the money needed to pay off your car loan. In other words, it covers the gap between your new car’s actual cash value (ACV) and the amount you owe on the vehicle.

So let’s take another look at our 2020 Honda Accord. You took out a loan to purchase the car, and now you still owe $28K on it. If you don’t have new car replacement or gap insurance, you’ll receive the car’s actual cash value of roughly $26K, minus your deductible. That leaves you still owing $2K more than you received.

Gap insurance would give you that additional $2K so you could pay off the loan. New car replacement will give you the amount needed for a new car like the one you lost regardless of the amount on your loan.

Both mean that you’ll probably get a larger payout if your new car is totaled, but new car replacement means your payout will allow you to buy a new car. Gap insurance would give you what you needed to pay off the loan on the old one.

Is new car replacement insurance worth it?

Only you can decide if new car replacement insurance is worth it. Here are a few factors to consider:

  • Your financial situation: If buying that new car took just about every penny you have, you might want to skip anything over your state’s minimum insurance requirements. But keep in mind that you’re taking a risk on the possibility of an accident that totals your car.
  • The likelihood of an accident: If you only drive a few miles to work and shopping or don’t do a lot of high-traffic driving, you’re less likely to have an accident that would total your car, and less likely to need new car replacement coverage.
  • The cost of your car and its depreciated value: Some cars, such as sports cars, depreciate more quickly than others. If your car depreciates quickly, new car replacement insurance could be a good idea.
  • The type of car you drive: Cars that depreciate more slowly, such as Toyotas and Volvos, hold their value through the first few years. So the check you get from your insurer following an accident that totals your car, even without new car replacement insurance, will be higher.

New car replacement insurance can be a worthwhile option to consider when you purchase a new car, especially if you drive a great deal — which leaves you more likely to be involved in an accident. If you work from home or are retired and drive very little each year, it may be less necessary to consider this type of coverage. Another factor is whether your car depreciates slowly or quickly. New car replacement insurance may be more beneficial for those who have a car that depreciates quickly, rather than for those who have cars such as Volvos that traditionally hold onto their value for a longer period of time.

Frequently asked questions

    • Talk to your insurance agent to find out the costs for new car replacement coverage for yourself because it varies from person to person.
    • Generally, no. Most insurers require you to be the first titleholder of a new car to purchase this coverage. A better bet for you in that case would be to consider gap insurance, so that you can pay off the remainder of your car loan in the event of an accident.
    • Some companies allow you to purchase it any time within the first year or another period of time. Nationwide, for example, will add it to your policy any time within your first six months of owning the car, as long as it’s before an accident.