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Buying a brand new car is expensive. Unfortunately, as soon as you drive that vehicle off the lot, it loses around 10% of its value. This isn't a big deal if you're going to keep the car for a long time. You can just enjoy that new car smell without worrying too much about the fact that your car is already worth less than you paid.
Imagine, though, that you get into an accident weeks after buying that new car, and your vehicle is totaled, or your car gets stolen soon after you drive it away from the dealer.
Now you have a problem because the insurer pays only the fair market value. If you paid $55,000 and your car is worth only $45,000, then $45,000 is all the insurer will pay. With your insurance check in hand, in order to replace the new car you no longer have, you'd either need to bring money to the table or look at cheaper older cars costing $45,000 or less.
Neither option sounds appealing. That's why you should think about including new car replacement coverage when you buy a new car. Companies that offer this type of coverage include Allstate, American Family, Farmers, and The Hartford.
Key takeaways
- New cars lose their value quickly, which is a problem if your new car is stolen or totaled soon after you buy it.
- Your insurance company will usually pay you only the fair market value of your car, which likely wouldn't be enough to buy a comparable new vehicle.
- New car replacement coverage ensures your insurance company pays you the amount of money you need to buy a new car that's equivalent to the one that's gone.
What is new car replacement coverage?
New car replacement coverage protects you if you buy a new car and then that new car quickly gets stolen or damaged beyond repair. It's one of several types of car insurance options you may choose to add to your policy.
When you add car replacement coverage to your auto insurance policy, you'll have the peace of mind knowing you could buy another new car if something happens to your current vehicle.
This is important because new cars decline in value quickly, and insurance companies usually pay only the fair market value of your vehicle at the time of the covered incident, not what you paid for the car.
Let's say you worked hard to buy a brand-new vehicle, but got into a crash a few weeks later. Since your car isn't new anymore, it's not worth what you paid or even close to it. If you get a check for the fair market value, which is only 90% of what your car cost, you'd be thousands short on the purchase of a new car — especially if you also have a deductible to cover.
Your options would be to cough up the cash difference to buy a new car again or buy something cheaper — probably an older car with fewer features. But if you had purchased new car replacement coverage, you would receive enough from your insurance to replace your brand-new vehicle with another brand-new vehicle.
If you want car replacement coverage, you have to choose to add it to your policy before an accident happens. And not all auto insurers make it available, so you may have to research which insurance companies offer new car replacement coverage when you buy your policy.
Which insurance companies offer new car replacement?
So, which insurance companies offer new car replacement coverage in case you want to buy it?
While this coverage isn't as widespread as some other add-ons or riders, many big-name insurers offer it, including:
| Allstate | New car replacement coverage is available for vehicles 2 years old or newer. |
| American Family | You can buy this coverage for brand-new cars, but it's automatically removed when you renew your policy after the first year of coverage. |
| Farmers | Farmers offers coverage if your car is totaled within the first two model years and if it has fewer than 24,000 miles on it. |
| The Hartford | You'll be covered for the replacement of a new vehicle purchased within the last 15 months or with 15,000 or fewer miles |
| Travelers | Travelers provides new car replacement coverage for vehicles 5 years old or newer. |
| Liberty Mutual | Cars that are less than 1 year old with fewer than 15,000 miles are covered by Liberty Mutual's new car replacement protection. |
| Nationwide | Cars that are 3 years old or newer are entitled to new car replacement coverage through Nationwide. |
It's important to read the fine print and make sure your car qualifies with your preferred insurer — especially since some insurers count a vehicle as "new" for just 1 year, while others give you 5 years of protection.
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Who is it right for?
New car replacement coverage is a good buy for someone who has a brand-new car and wants to make sure they won't get stuck with a downgrade if someone steals their vehicle or a serious crash happens that totals it.
Most auto insurers have rules on exactly what kinds of cars qualify for new car replacement coverage. For example, you may be able to buy this insurance add-on if the car you're purchasing:
- Is less than a year or two old
- Has under a certain number of miles, such as fewer than 15,000
- Is not leased (you are buying or financing it)
- Doesn't have any previous owners
You also need to buy collision and comprehensive coverage if you want new car replacement coverage. Collision coverage pays for your losses if a crash happens that isn't the fault of another driver, and comprehensive coverage pays for all non-crash losses.
It makes sense to require that you have collision and comprehensive coverage first. After all, without them, your insurer would pay nothing if your car were stolen or damaged. Collision and comprehensive coverage kick in first, then new car replacement would cover what's left for you to be able to purchase a comparable new vehicle.
However, adding new car replacement coverage to your auto insurance policy will increase your premium. Typically, the increase in cost will be 5% to 10%. That should be taken into consideration when evaluating whether car replacement coverage is right for you. Of course, you can choose to add it to your policy when purchasing a new car and later on remove this optional coverage when you're ready.
Gap coverage vs. new car replacement
New car replacement coverage is one type of car insurance add-on designed to protect you against losses resulting from the fact that cars go down in value quickly after you buy them. Gap insurance is another.
Gap insurance works differently from new car replacement coverage. It just pays off the balance of your auto loan or lease if the car you financed is stolen or damaged beyond repair. It doesn't entitle you to a brand-new comparable car. It ensures you don't get stuck paying for the car that was destroyed or stolen.
Say that Sarah bought a new car for $50,000 with a $42,000 loan; she made an $8K down payment. Sarah's car gets stolen a short time later, and it's worth only $40,000 at the time. Her insurer would pay her just $40,000 (minus her deductible), leaving her with a $2,000 balance on her loan. Gap insurance would pay off that extra $2,000, giving her a total payment of $42,000.
The problem is that Sarah wouldn't get the full $50,000 to go buy the same car again. She'd be out $8K for the down payment and would have to save up again or borrow more to buy the same vehicle. On the other hand, if Sarah had new car replacement coverage, her insurer would give her the $50K she needs to purchase the same car the thieves stole.
Gap insurance is more widely available, and it's an important kind of protection, so you don't get stuck with a loan balance on a car you can no longer drive. However, it won't necessarily make it possible for you to get back into the same version of the vehicle you bought before. So, make sure you think carefully about whether either or both kinds of coverage make sense for you.
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Which insurance companies offer better car replacement?
Better car replacement coverage is a twist on new car replacement coverage. With this coverage, if your new car is totaled, you don't just get to replace it with a comparable one. You can buy a better one.
Liberty Mutual is currently the only insurer offering better car replacement coverage. If you add this to your policy and you get into a collision, Liberty Mutual will give you the money to buy a replacement vehicle that is 1 year newer than the one you had, and that has 15,000 miles fewer.
So, if you crashed your 2023 SUV with 55,000 miles, Liberty Mutual would pay you enough to get a comparable 2024 car with just 40,000 miles instead. If you want to ensure an upgrade in the event of an accident or covered incident, this is the way to go.
FAQs
Does insurance give you a replacement car?
Insurance does not give you a replacement car if something happens to yours. If you have collision or comprehensive insurance, your insurance company will pay for repairs or provide a check for the fair market value of your totaled vehicle.
It's up to you to fix the car or get a new one — and the money isn't always enough to get a comparable car unless you have new car replacement coverage.
Is new car replacement insurance worth it?
New car replacement insurance is often worth paying for.
New cars lose value quickly. If you don't have this coverage and get into an accident shortly after buying your vehicle, you could receive a lot less money than it takes to buy a comparable car. New car replacement insurance guarantees you an insurance payment sufficient to buy the car you had after it was stolen or destroyed in a covered incident.
Who gets the insurance check when a car is totaled?
If your car is totaled, insurance sends a check for the fair market value — but who gets the insurance check? If you own your car outright, the payment will come to you. If you don't, the check may go directly to your financing company or the leasing company. If there is extra money provided after your loan is paid off, the lender will send you the difference.
Bottom line
Knowing what new car replacement is and which insurance companies offer this coverage is important so you can put the right protections in place when you buy insurance.
Check out the best car insurance companies today to find an insurer that will replace your new car if it's totaled or stolen. This will give you the peace of mind that comes with knowing that an accident and a too-small insurance payout won't leave you stuck with an old car after your new one is gone for good.
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