New Car Replacement Insurance Explained

There's nothing like getting behind the wheel of a new car from the luxury to the high-tech functionality. But that new car scent is often accompanied by new car-loan anxiety.

A new vehicle's luster may not fade after a few weeks, but a car depreciates as soon as you drive it off the lot. Cars may lose up to 10 percent of their value in the first three months of ownership and even up to 20 percent within the first three months, according to CarFax.

Missed payments can come back to bite you if you get into an accident shortly after purchasing your vehicle. Your auto insurance company may appraise your car at a lower amount than the original sales price because of depreciation and your reimbursement check might not be enough to cover the loan. Therefore, you bear the financial burden of shelling out the difference to your lender.

The solution in this case is called new car replacement insurance. Many car insurance companies provide this solution. It may be subject to an additional charge, but you might decide that extra expenditure is worth it.

What Is New Car Replacement Insurance?

New car insurance covers the cost of a new car of the exact same make and model (excluding your deductible) rather than the depreciated value of a totaled automobile if you drive a new vehicle that is deemed totaled.

For example, suppose you buy a new car for $40,000 and purchase a new car substitute insurance. After several months, the value of the new car has lost $36,000, and your automobile gets into a wreck, losing total value. With new car substitute insurance, your insurance company would pay for a new replacement vehicle of the same model, not just $36,000.

If you had your car insurance company not for new car replacement, you would have to put aside the difference if you bought another new car of the same model. 

Here are a few other things to know about new car replacement insurance.

New car replacement coverage may be available as long as you have collision and comprehensive insurance

If you just have collision and comprehensive insurance, you can generally purchase replacement auto insurance directly from your insurer.

Your vehicle must meet age and mileage requirements to qualify

Eligibility requirements for coverage for a new car replacement may vary depending on the insurance company. One example is, Erie Insurance Agency's New Auto Security add-on will reimburse an insured party for the cost of purchasing a new vehicle when the car is less than two years old and the latest model. If the car is older, this coverage will not be available.

Farmers auto insurance offers new car replacement insurance if a vehicle meets the requirements for two model years and 24,000 miles. Check the specifics before accepting these parameters.

Some insurance companies offer “better car replacement” insurance

When you have better car comprehensive insurance, you're entitled to receive money for a newer or nicer model of your car. For example, Erie Insurance will reimburse you the cost of replacing your totaled vehicle with a new model if you have owned it for less than two years. If you have owned it for more than two years, you will receive reimbursement for the cost of the more similar option.

There’s a deductible

Generally, your deductible will be applied to your new-car replacement cost. Your deductible is the amount that the insurance company deducts from your settlement check. For instance, if your claim check is $20,000 and you have $500 in deductibles, the insurance company will pay $19,500.

New Car Replacement Insurance Rules and Limitations

Here are a few regulations about insurance on new car purchases.

• Policy purchase windows: Insurance providers may define a time frame for when you must purchase new car replacement coverage. For example, Nationwide auto insurance requires you to buy insurance within 6 months of a new car purchase. Erie Insurance allows you to add it to a policy at any time, so long as you ve done it before an accident.
• New car replacement insurance cannot be combined with gap insurance: Gap insurance may not quite cover both a newer car replacement payout and the residual amount on your loan or lease contract. If your car is considered a total loss, gap insurance can cover the difference between the resulting redemption value of your contract and the actual cash value of your car.

Insurance Companies That Sell New Car Replacement Insurance

New car replacement insurance may not be offered by all insurance companies and may not be available in all regions from insurers that offer it.

Insurance companies provide new car replacement coverage:

• AARP Auto Insurance from The Hartford: You can get new car replacement insurance if your car is totaled in the first 15 months or 15,000 miles (whichever comes first).
• Allstate: New car replacement insurance from Allstate will replace a new car if it is two model years old or less.
• Amica: Amica furnishes new replacement coverage to customers who have an effect on its Platinum Choice Auto package. Insurance companies will replace a totaled vehicle with a new one if it has fewer than 15,000 miles and is less than 12 months old.
• Erie Insurance: Erie now provides financial security for newer cars, replacing cars that are just two years old. If you own a car that is less than two years old, Erie will receive you a new one that is about two years newer.
• Farmers: New car replacement by Farmers insurance will replace your car with a new vehicle of the same make and model if the car is totaled within the first two years of ownership as well as 24,000 miles.
• Horace Mann: Horace Mann offers both new car replacement and better car replacement. If you are an educator, you can receive new car replacement as part of your Educator Advantage Program.
• Liberty Mutual: New car parts replacement insurance from Liberty Mutual covers your new car if the value of your wrecked vehicle is $1,000 or less, or if it is under one year old and has less than 15,000 miles. They offer higher parts replacement coverage that will pay for a spare car that is less than one model year newer and 15,000 miles to your current one.
• Nationwide: New insurance covers replacing the car so long as it is less than three years old.
• Travelers: New-car replacement coverage from Travelers refunds you for a new passenger vehicle of the exact same make and model if your vehicle is totaled within the first five years of ownership.