What Is New Car Replacement Insurance & How Does It Work?

New car replacement insurance is an excellent option for people who want to protect their brand-new car through the first year of ownership. If your vehicle is totaled in an accident, this coverage pays the full purchase price for a car of the same make and model.

Last Updated: 3/26/2022
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New car replacement insurance covers the cost to buy a new car of the same make and model if your vehicle is totaled in an accident. Insurers base payment on the vehicle's full price — without considering depreciation — minus your deductible.

While this coverage can be beneficial, it may not be for everyone. Typically, it’s best for drivers with brand-new cars or luxury cars. If you want to buy this coverage, most insurance companies require that you purchase it within six to 18 months of buying your new vehicle.

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Key Takeaways

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You need to have full coverage insurance to purchase new car replacement insurance.

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New car replacement insurance applies to recently bought cars; most insurance companies require you to buy it shortly after purchasing a new vehicle.

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Various factors affect the cost of new car replacement insurance, including the car’s purchase price, your location and your driver profile.

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What Is New Car Replacement Insurance?

Generally, insurance payout tends to be much less than people expect because of how quickly cars depreciate.

Getting auto insurance with new car replacement can benefit some drivers, especially those who own a recently bought new car. With this coverage, you’ll be paid enough to buy a new vehicle of the same make and model after a total loss.

New car replacement insurance is ideal for people who want to protect the value of their car through the first year of ownership. This coverage ensures you won’t have to downgrade to a less valuable vehicle if your vehicle is totaled shortly after buying it.

Say you bought a new car for $30,000 and purchased new car replacement insurance. After a few months, this car’s value depreciated to $26,000, and you got into an accident that caused total damage. New car replacement coverage would help you get a payout high enough to buy a new car of the same make and model ($30,000) instead of receiving a payout equal to your car’s current worth, or $26,000.

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New car replacement insurance covers the cost of replacing your car with a similar make and model in the event of a total loss. There’s a time window for buying this coverage, depending on the insurance company.

For instance, Liberty Mutual only issues new car replacement insurance to vehicles less than one year old. Meanwhile, Nationwide only accepts cars less than six months old for this same coverage. Be sure to reach out to your insurance provider to learn about their specific new car replacement insurance policy.

How Does New Car Replacement Insurance Work?

Understanding how new car replacement insurance works can help you determine if it’s right for you. Generally, this coverage applies if your vehicle is declared a “total loss” after an accident. In this instance, you’d be refunded your vehicle’s full cost — without counting depreciation — minus your deductible. If you don’t have this coverage, you’ll only receive your car's actual cash value (ACV), which considers depreciation.

For example: if your car costs $30,000 brand new and you get into an accident after a few months, your insurance will only pay the ACV if you don’t have new car replacement coverage. If your car’s value has depreciated to $26,000, that’s how much you’ll receive from your provider. In this case, you’d have to cover the remaining amount necessary to buy a similar car or downgrade to a lower-cost vehicle.

It’s important to note that there are restrictions and requirements on new car replacement insurance. For instance, insurance companies require that you have full coverage car insurance. There’s typically a window of time after purchasing a new car when you’re allowed to get this coverage, but this window varies among providers. Be sure to reach out to your insurance company for more information.

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New car replacement insurance pays for the full vehicle cost, minus your deductible. In comparison, comprehensive and collision payouts consider depreciation and only pay for the ACV of your car.

PAYOUT = FULL VEHICLE COST − DEDUCTIBLE

Getting insurance with new car replacement is an excellent idea if you have a brand-new or luxury vehicle. However, it’s essential to consider the cost of this coverage. While getting the original value of your car is preferred, this coverage may cost more to secure.

How Much Is New Car Replacement Insurance?

The cost of new car replacement insurance varies depending on your vehicle, provider, location and unique driver profile. Some companies add a surcharge to your original policy’s premium for this coverage, such as an additional 5%. Others provide this coverage at no extra cost. It’s best to get a personalized quote from all the companies you’re considering to see how much this coverage could cost you.

Factors that Impact the Cost of New Car Replacement Insurance
  • Factor
    Description
  • Company
    There may be a surcharge for buying insurance with new car replacement depending on the company. However, some companies offer it at no extra cost. Compare quotes from multiple insurers to find the best option for you.
  • Purchase Price
    The cost of your car will have an impact on your insurance premium. Since new car replacement insurance pays for the full cost of your vehicle, having a higher value car could cost you more. But, this coverage may also be worthwhile if you have a high-value car.
  • Location
    Where you live also plays a significant role in your insurance costs. That is because of differences in location-specific factors, like vehicle theft incidents, car accident statistics and dangerous intersections.
  • Driver
    The likelihood of a car accident is also affected by the type of driver you are. Typically, teen drivers are considered riskier than middle-aged drivers, so their insurance costs are higher than average. You may also get higher rates if you have violations on your driving record.
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New Car Replacement Insurance vs. Gap Insurance

There are a few different coverage options available to drivers with newer vehicles. New car replacement insurance pays out the cost to replace your car with a similar make and model.

Gap insurance offers similar coverage. However, instead of paying your vehicle's entire original purchase value, gap insurance covers the difference between what your vehicle is currently worth the amount you have left to pay off on your car’s loan.

In some cases, gap insurance saves you more money in the long run. It may also be available for more years than new car replacement, which is good if you are financing your car. The best way to find out is to compare quotes from different providers.

It’s important to note that it is not possible to combine these two coverages. Depending on your circumstances, you may also opt to skip getting both. However, if you’re still paying off a car loan and don’t buy gap insurance, make sure you have enough savings to repay a lender if the car is totaled and make a down payment on another vehicle.


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New Car Replacement Insurance:

  • Applicable to recently bought cars; needs to be purchased within a specific time frame.
  • Covers the full cost of replacing the vehicle without considering depreciation.
  • May come at an extra cost.
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Gap Insurance:

  • Applicable to leased or financed cars.
  • Covers the difference between the car’s ACV and the overdue loan or lease payments at the time of the total loss.
  • May come at an extra cost.

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Gap insurance is a type of coverage that helps you pay for your auto loan or lease if your car is declared a total loss after an accident. For example, say your car’s ACV at the time of the accident is $18,000, but you still have a $20,000 loan balance. Your collision coverage will pay only $18,000, while gap insurance covers the remaining $2,000.

New Car Replacement Insurance vs. Better Car Replacement Insurance

When choosing coverages for a new vehicle, you may also come across better car replacement insurance. While new car replacement and better car replacement insurance are meant to cover the cost of replacing a car, the coverage that’s right for you will depend on your needs.

New car replacement insurance is typically only available for new cars less than a year old. On the other hand, better car replacement coverage can be purchased for older cars and typically replaces your vehicle with a comparable, newer model. However, the exact terms of this policy can vary depending on your provider.

It’s also important to keep in mind that only a few companies offer better car replacement insurance, including Erie, Liberty Mutual and Selective.


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New Car Replacement Insurance:

  • Applicable to recently bought cars
  • Pays for the full cost of replacing the vehicle should it get totaled
  • May come with an extra cost
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Better Car Replacement Insurance:

  • Applicable to not-so-new cars
  • Allows you to upgrade should your covered car gets totaled
  • May come with an extra cost

Choosing better car replacement insurance can allow you to upgrade your car if it’s totaled in an accident. However, it's worth noting that combining new car replacement and better car replacement coverages is not possible.

You may also choose to skip both of these insurance options. However, if you do, it’s still crucial to make sure you have enough insurance coverage to purchase a new vehicle if yours is deemed a total loss in an accident.

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Some insurance companies, including Erie, Liberty Mutual and Selective, offer better car replacement insurance. This coverage compensates for total loss after an accident and typically funds the purchase of a slightly new vehicle model.

For example, Liberty Mutual’s better car replacement insurance pays a car one model year newer and with 15,000 fewer miles than the one you totaled.

Should You Get New Car Replacement Insurance?

New car replacement insurance is not for everyone. Depending on your circumstances, it may not be necessary.

Generally, new car replacement insurance is an excellent option if your car is brand new. Drivers with luxury cars can also benefit from this coverage because the value of luxury and electric cars tends to depreciate faster than average.

You Might Benefit from New Car Replacement Insurance If:
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    You have a new car.

    If your car is less than a year old or has not reached 15,000 miles, getting this coverage makes sense. If your covered vehicle is totaled, this coverage can help you purchase a new car of the same make and model.

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    Your car’s value depreciates fast.

    The value of some cars, such as sports cars and luxury vehicles, depreciates faster than average. In such a case, paying extra for new car replacement insurance can be beneficial since this coverage pays out the original value of your vehicle.

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    The risk of getting in an accident is high.

    Location is a significant factor to consider when deciding if new car replacement insurance is worth it. For instance, if you regularly drive a new car in areas with heavy traffic or through dangerous intersections, your likelihood of getting in an accident is higher.

New car replacement insurance is likely unavailable to you if you drive an old car. It may also not be beneficial if you drive a new, low-value car. You could pay more in additional insurance coverage than your car is worth in this case.

Choosing insurance with new car replacement is also not common in the United States because most people buy used cars. In 2020, approximately 39.3 million units of used light vehicles were sold in the U.S.; only around 14 million new light trucks and cars were sold in the same year.

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If you think that getting extra coverage for your new car is right for you, we recommend getting personalized quotes and comparing costs for different solutions, like new car replacement insurance, better car replacement and gap insurance.

Companies That Offer New Car Replacement Insurance

Finding new car replacement insurance can be fairly simple. Of the biggest insurers in the country, 24 offer this coverage. In most cases, the car must be one to two years old or have less than 15,000 miles to be eligible for this coverage.

MoneyGeek analyzed quotes and policies from insurance companies that offer new car replacement insurance. Allstate ranked first overall after getting the highest ranking in 40 states; Farmers came in second.

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MoneyGeek Top Pick
Allstate

Allstate offers new car replacement insurance for drivers whose car is two model years old or less. Instead of receiving a check for the car's depreciated value, the policy owner is supplied with a new model.

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MoneyGeek Top Pick
Farmers

Farmers’ new car replacement insurance pays for the replacement cost for a new car of the same make and model. Your vehicle must be two model years old or less and only have 24,000 miles on it to get this coverage.

Best Company With New Car Replacement Insurance by State

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Other Companies That Offer New Car Replacement Insurance

Companies That Offer Better Car Replacement Insurance

Better car replacement insurance allows the policy owner to upgrade their vehicle to a newer model after their original car is declared a total loss in a covered accident. This coverage is sometimes considered an improved version of the new car replacement insurance. In most cases, you can get a vehicle that’s one or more model years newer than your totaled car.

Three companies currently offer better car replacement insurance: Erie, Liberty Mutual and Selective.

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MoneyGeek Top Pick
Erie

Erie’s better car replacement insurance is called Auto Security. This coverage allows you to receive a replacement car of the newest model year if your totaled vehicle is less than two years old. If your vehicle is more than two years old, you get a replacement vehicle with a model two years newer.

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Liberty Mutual

With Liberty Mutual’s Better Car Replacement Coverage, you’ll receive a vehicle that’s one model year newer and has 15,000 fewer miles than your totaled car. However, keep in mind that you need comprehensive coverage to get better car replacement insurance. Additionally, you can’t get this coverage if you have a leased vehicle.

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Selective Insurance

Selective offers better car replacement insurance as an add-on called Selective Car Replacement Loss. With this coverage, Selective pays to replace your vehicle with the latest model year available. You can choose to keep this coverage for two, four or six years after your purchase date.

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Better car replacement and new car replacement insurance both offer full payment to replace a totaled car. However, the latter only applies to new vehicles typically less than a year old. Better car replacement can be seen as an improved version of this coverage since it allows you to get an upgraded vehicle model in the event of a total loss.

Frequently Asked Questions

Finding the right coverage for your new car depends on your circumstances and needs. MoneyGeek answers some frequently asked questions to help you determine if new car replacement insurance is right for you.

About the Author


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Mark Fitzpatrick is a senior content manager with MoneyGeek specializing in insurance. Mark has years of experience analyzing the insurance market and creating original research and content. He graduated from Boston College with a Bachelor of Arts and Johns Hopkins University with a Master of Arts.


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