Key takeaways
- New car replacement covers the cost of a brand new car of the same make, model and year if yours is totaled, rather than paying the claim out at actual cash value (ACV) after depreciation.
- This optional coverage can only be purchased for vehicles under a couple of years old and below a certain mileage threshold — requirements vary by provider.
- You usually must have full coverage, which includes liability plus collision and comprehensive coverage, to add new car replacement to your policy.
- Typically costing around 5 percent of your overall premium, new car replacement insurance can be especially valuable if your car depreciates quickly or repair costs are high enough that insurers are more likely to declare a total loss.
What is new car replacement insurance?
New car replacement insurance is optional coverage you can purchase on top of the minimum amount of liability car 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). Most insurers also require you to carry collision and comprehensive coverage to have new car replacement auto 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, model and year. It should be enough for you to purchase the exact same car as the one you lost.
How does new car replacement insurance work?
Let’s say you bought a new 2024 Honda HR-V for $25,000. 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 $21,000 (minus your deductible). With your new car replacement coverage, however, you’ll receive a check closer to the $25k (again, minus your deductible) you paid for the car — enough to purchase another 2024 Honda HR-V.
Who is new car replacement insurance good for?
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.
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 generally 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: This will vary from provider to provider, but new car replacement insurance typically applies to cars under a year or two old with less than 15,000 miles. If your vehicle is totaled after these thresholds, 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 has 15,000 fewer miles on it. 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.
| Insurance provider | New car replacement requirements |
|---|---|
| Allstate | Allstate covers cars two years old or less. |
| 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 AARP-exclusive 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. |
You may notice that some major insurers, such as Geico and State Farm, are not included in the chart because they don’t offer new car replacement coverage. Understanding a provider’s coverage options when shopping for car insurance is essential to ensuring you can purchase the financial protection you want and need.
New car replacement insurance vs. gap insurance
Whenever you file a claim through your collision or comprehensive coverage for an at-fault accident, or through another driver’s liability coverage when you are not at fault, you will receive the actual cash value (ACV) of your vehicle for a total loss claim. This means your payout will be based on the depreciated value of the vehicle at the time of the claim, not the price you paid to drive it off the lot.
Considering new cars can lose nearly 30 percent of their value in the first two years of ownership, the difference between the ACV of your vehicle and what you paid can be significant — especially for expensive luxury vehicles.
New car replacement and gap insurance, otherwise known as guaranteed asset protection, can be added onto your full coverage policy to help protect you against the financial blind spot that is depreciation. However, as outlined in the chart below, they do it in different ways:
| Insurance | New car replacement | Gap insurance |
|---|---|---|
| Definition | Pays the cost to replace your totaled car with a brand-new one of the same make/model. | Pays the difference between your car’s depreciated ACV and outstanding loan/lease balance. |
| Purpose | Replaces the car with a new one after a total loss. | Ensures you don’t owe money to your lender after a total loss. |
| Claim | Drivers must get the same car. | Drivers can get a different type of car but the payout goes to the lender. |
| Best for | Drivers who want to walk away with a brand-new car if their recent purchase is totaled. | Drivers who financed or leased and owe more than their car is worth. |
| Example | If your car’s ACV is $24K but you paid $28K, new car replacement coverage pays close to $28K with your loan carrying over to the new replacement vehicle. | If your car’s ACV is $24K and your loan balance is $26K, your full coverage policy would cover close to $24K and gap insurance would cover the $2K difference so you can pay off the loan. |
Understanding ‘how does replacement insurance work for new cars?’ and how it compares to gap insurance can help you determine which add-on is right for you and your vehicle.
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.
What are real-life policyholders saying about new car replacement insurance?
New vehicles only seem to be getting more expensive. While this may create more sticker shock, the inflated prices can technically work to your advantage.
Part of the reason new vehicle prices are high is that today’s cars are equipped with innovative driver-assistance technologies and advanced safety systems. These components can be very expensive to fix, meaning even a decent fender-bender could cause enough damage that your insurer would rather deem the car a total loss than make the repairs.
On Reddit, we found a few policyholders who benefited from these circumstances and were thankful to have purchased new car replacement insurance:
*The quotes and citations included on this page have been verified by our editorial team and are accurate as of the posting date. Outlinked content may contain views and opinions that do not reflect the views and opinions of Bankrate.
Frequently asked questions
-
A general rule of thumb is that this type of coverage costs about 5 percent of your policy’s total. However, like with any type of car insurance, the cost for new car replacement insurance will vary from person to person (or rather, car to car).
The best way to see how much any type of car insurance would cost for you is to contact several insurers that offer it and request quotes for the same types of and levels of coverage.
-
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.
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Some car insurance 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.
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