What is new car replacement insurance?

With new car replacement insurance, your auto insurance company will pay you the full amount you owe on your car if you total it. You'll pay an additional 5% for this benefit.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insuranc...

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years (BBB A+). He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com and Safeco. He reviews content, ensuring that ex...

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Nov 17, 2021

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Things to remember...

  • New car replacement insurance is not required
  • GAP insurance is very similar to new car replacement insurance
  • Not all cars qualify for this type of coverage
  • Cars depreciate quickly
  • Making a large down payment might eliminate your need for this kind of insurance

Driving a new car off the dealership lot is an exciting moment, but it comes with numerous things you’ll want to take into consideration. New cars depreciate quickly. Depreciation means the car you’re buying immediately loses value when you first remove it from the dealership lot as the owner.

Test drives and putting a few miles on a car don’t cause depreciation to occur, but driving it home that first time causes it to occur rapidly. Depreciation doesn’t mean the car is slightly less valuable, but that the car is worth thousands of dollars less than the price you just paid. Unless you put down a significant sum of money, you are upside down on your loan.

When you’re upside down on a loan, you owe more on the vehicle than the value of the car. This means you cannot trade in your car for what you owe on it or sell it for what you owe since it’s no longer worth that much. If you were to get into an accident after driving the car off the lot, the payout from insurance won’t be enough to pay off the vehicle.

That’s why it’s imperative to know what new car replacement insurance is, how it works, and why you must have it before you begin comparing car insurance rates for any new car you’re thinking of purchasing.

Make sure you act now to cover your new car. Enter your zip code above and compare three to four quotes from different providers!

What is new car replacement insurance?

>New car replacement insurance is an added benefit to your typical insurance policy. You want to be sure you’re asking for quotes that contain this kind of insurance if you drive a new car. When comparing policies and rates, this is a must.

It’s the kind of insurance that allows you to breathe a sigh of relief from a financial aspect if your new car is involved in an accident and declared a total loss by an insurance adjuster.

Without new car replacement insurance, your new car will not be paid off by the insurance company when it’s totaled. Insurance is only required to pay you fair market value for the vehicle, and it’s almost always less than what you owe. Can you afford to pay off the difference out of your own pocket if an accident occurs and your car is a total loss?

New car replacement insurance works like this. You pay for this coverage for your policy, and your insurance company will give you a check for the full dollar amount you owe on your car if you are involved in an accident in which your vehicle is deemed a total loss.

This coverage means less financial stress for you, and it means fewer out-of-pocket expenses are incurred on your behalf.


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Should you purchase new car replacement insurance?

There are pros and cons to new car replacement insurance, and it’s important you recognize them prior to searching for car insurance quotes. Some companies will quote you higher and some will quote you lower, and your job is to compare the policies to see which one works best for you.

  • It’s an added expense you pay each month when you pay your car insurance premium
  • GAP insurance is another consideration you have rather than adding to your insurance policy
  • Not buying some kind of additional coverage can cost you significantly out of pocket
  • It’s only available on newer cars

New Car Replacement Coverage

If the car you drive is more than a few years old and doesn’t have a loan on it, you’re not going to need this kind of coverage. As you compare rates with different companies for an older car, you might even find they aren’t willing to sell this form of coverage to you due to the age of your vehicle.

If you made a small down payment or didn’t make one at all, you want this kind of coverage. The average car depreciates approximately 15 percent each year, which means you’re going to owe out of pocket if your car is totaled.

If you drive a $50,000 vehicle for one year, it’s only worth $42,500. If you financed 100 percent of the car, you’ll owe more than $7,000 if your car is totaled. Is it an amount you can afford to pay out of pocket?

GAP Coverage

The other consideration is GAP insurance. It’s offered by a car dealership, and it’s sold to you in addition to the price of your car for $500. Before you buy this insurance through the dealer, compare rates with car insurance companies to find out what is the most cost-effective way to insure your new car.

Will you pay less to insure it with new car replacement coverage or by paying the flat fee for GAP insurance and being done with it? This question is an important to ask.

Don’t Be Stuck

The purpose of new car replacement insurance is to minimize your financial strain if something happens to your vehicle and it’s totaled. Any damage exceeding 75 percent of the value of the car automatically makes it a total loss.

If your car is a total loss and you don’t receive a big enough check from insurance to pay the loan, you’re stuck continuing to make your car payment until it’s paid in full if you cannot afford to pay out of your own pocket.

The final note regards collision and comprehensive insurance. Neither is mandatory for any driver unless your vehicle is leased or financed, but both are necessary if you want to purchase new car replacement insurance. Before you buy a new car, consider several factors.

  • The cost of the car
  • The amount of money you are putting down on a new car
  • The depreciation of the vehicle
  • The amount of driving you do that puts you at risk

Ask around for quotes that include collision, comprehensive, and new car replacement costs. Compare this to the cost of purchasing GAP insurance from the dealer, and use this information to make an informed and educated decision regarding your new insurance policy.

No two policies are the same, and each one is affected by your personal driving record, your credit report, and other factors.

It means no two companies offer the same rates for the same policies, and some people might find it’s more cost-effective to insure their car the traditional way or by purchasing additional insurance through the dealership.

If you’ve considered new car replacement but haven’t taken action, it’s easy to get started. Just enter your zip code and starting comparing policies from providers in your area!

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