Though we don’t like to think about it, every time you take your car on the road, there’s always the possibility of an accident, and with it, the possibility of the loss of your vehicle. Obviously, lives take priority over any possible property damage or loss that would occur, but a totaled vehicle causes a disruption and inconvenience to our lives. Typical state, lessor, and lienholder insurance requirements offer a measure of protection to safeguard your financial investment, but there’s additional coverage you can get to close any potential financial gaps in the event your vehicle is totaled and needs to be replaced. An optional coverage, new car replacement insurance, may not be as widely known, but it could provide the safety net you need.

What is new car replacement insurance?

New car replacement insurance allows you to replace a vehicle that’s been totaled. It pays the cost of a new car of the same make and model that you just lost, minus a deductible. This is significant because in the event of a total loss, insurance companies will only supply you with the actual cash value (ACV) of the damaged car, which will always be lower than what you paid for it due to depreciation. With only an ACV payout, the financial gap will be greater in terms of what you’ll need to pay to secure a new car. So, new car replacement insurance lessens the burden financially of getting a new car after you’ve suffered a total loss.

What does a total loss mean?

If an insurance company has deemed your vehicle a total loss after an accident, that means the cost of repairing the vehicle exceeds its estimated value. Some states have a total loss threshold (TLT), where a total loss can be declared if it exceeds a certain percentage of a vehicle’s value. Insurance companies are only required to pay the fair market value of the property, nothing more. A stolen vehicle would also be considered a total loss.

Why is it useful?

New car replacement insurance is useful because of the depreciation of cars. Though rates can be higher or lower depending on the make and model of certain cars, it’s estimated that vehicles lose over 10 percent of their value within the first few months of ownership and over 20 percent within the first 12 months. Depreciation is a financial certainty for all car owners and one with an impact if you need to recoup a loss.

Requirements to get it

Though it may provide a measure of peace in terms of protecting your car and policies will vary by company, new car replacement insurance comes with a number of requirements.

  • It only applies to newer cars as opposed to used or pre-owned cars.
  • You must have comprehension and collision coverage.
  • The age of a vehicle as well as mileage requirements will apply.
  • There may be a purchase window or a limited window of time to purchase this type of insurance.

How does it work?

As an example, let’s say you purchase a 2020 Mazda sedan for $21,500 and within 11 months, find it totaled after a collision with another driver. Though you were unhurt, you’ll need to get a new car. Luckily, at the time of your vehicle purchase, you decided to get new car replacement coverage and so you will receive a payout closer to $21,500, minus a deductible, which will enable you to get a replacement vehicle of the same make and model. Without new car replacement insurance, you would receive a cash payout of $17,200, a difference of 20 percent.

New car replacement vs. GAP insurance

Some people may confuse new car replacement insurance with GAP insurance, but they’re two different coverage options. GAP insurance, or guaranteed asset protection, closes the gap on your loan or lease obligations. New car replacement insurance helps you buy a new car, while GAP insurance helps you pay off your totaled car. GAP insurance will make up the difference between the ACV of the totaled car and what you owe as a consumer. In contrast to new car replacement insurance, GAP coverage is more readily available to purchase.

Who offers new car replacement insurance?

Though it may be surprising, not all insurance companies and many top insurance carriers in the nation don’t offer new car replacement insurance.  Here’s a list of the ones that do:

  • Allstate. The company offers coverage for cars up to two years old.
  • Ameriprise Financial. You can get coverage within the first year of a vehicle purchase.
  • Erie Insurance. The company covers cars less than two years old or with a comparable model if your vehicle is more than two years old.
  • Farmers Insurance. You can get coverage within the vehicle’s first two years or 24,000 miles.
  • Liberty Mutual. The company offers coverage within the vehicle’s first year and under 15,000 miles.
  • MetLife. You can get a replacement vehicle if it’s less than a year old or has less than 15,000 miles.
  • Nationwide. The company offers coverage if the vehicle is less than three years old.
  • Travelers Insurance. You can be covered within the first five years of the vehicle.
  • The Hartford. The company offers coverage for the first 15 months or 15,000 miles, whichever comes first.

Is new car replacement insurance worth it?

On average, new car replacement insurance will cost 5 percent of your annual premium. If you’re wondering if it’s worth it, there are a few things to consider:

  • Your personal risk. How many miles on the road are you putting on your car? Are you using your car daily? Do you live in a high-traffic area? You should consider the likelihood of an accident that could leave your car totaled.
  • Your vehicle’s depreciation rate. Does your car depreciate quickly or is it expected to hold its value longer than other models?
  • Your ability to afford a new vehicle. If your vehicle becomes totaled, are you in a position to buy a new car with only the actual cash value that you will receive?
  • Your ability to pay for this coverage. If your annual premium is $1,500, can you afford the estimated $75 extra a year?

What Elephant offers: Loan/lease payoff coverage

While Elephant Insurance does not offer new car replacement insurance, it does offer loan/lease payoff coverage, a similar coverage to GAP. Loan/lease payoff coverage will help offset what you owe on a loan or lease up to 25 percent of the actual cash value of a totaled vehicle. So, if your totaled vehicle equates to $17,200 in actual cash value, you can expect to receive up to $4,300 to pay off your loan or lease obligations. Unlike GAP insurance, loan/lease payoff coverage will not cover deductibles. However, it does help to offset the remaining balance on a loan or lease should you be faced with owing more than the cash value of a totaled car.

Talk to an agent to determine whether loan/lease payoff coverage is right for you or to explore other coverage options. Get a quote with Elephant today.

Article last updated on July 11th, 2024 at 4:29 pm