Replacement Value: The Auto Insurance Offering You Need To Know About

Auto insurance companies do offer replacement value, but it's not a standard feature of car insurance policies. This type of coverage is known as new car replacement insurance or replacement cost value (RCV) insurance. It covers the difference between the actual cash value (ACV) of a totaled car and the cost of purchasing a new vehicle of the same make and model.

New car replacement insurance is an optional add-on to standard car insurance policies, and it's usually only available for new cars under a certain age or mileage threshold. The cost of this coverage is typically about 5% of your auto insurance premium, but it can vary depending on factors such as the driver's record, the vehicle's age, and the insurer.

Some insurance companies may also offer better car replacement coverage, which provides a car that is one model year newer and has fewer miles than the totaled vehicle.

New car replacement insurance

If your new car is stolen or written off in an accident, new car replacement insurance will pay out the cost of a brand-new car of the same make and model, minus your deductible. This is particularly useful if you would want to replace your written-off car with a brand-new car.

Who offers it?

Not all insurance companies offer new car replacement insurance. Some of the largest auto insurance companies in the US, including Geico, Progressive, State Farm and USAA, do not offer it. Some companies that do offer it include:

• Farmers Insurance
• Erie Insurance
• Liberty Mutual
• Allstate
• Travelers Insurance

The cost of new car replacement insurance varies depending on the insurance company, the driver, the vehicle, and the state. Some companies estimate that this optional coverage adds about 5% to 13% to the overall cost of your insurance.

Actual cash value (ACV)

The insurance company determines the depreciation based on objective criteria (a formula that considers the category and age of the property) and a subjective assessment (an insurance adjuster's visual observations of the property).

ACV is the standard that insurance companies prefer when reimbursing policyholders for their losses. The actual cash value of property is the value for which that property could be sold, which is usually less than the replacement cost.

When it comes to auto insurance, ACV is the amount that the insurance company determines someone would reasonably pay for the car, assuming the accident had not happened. Factors such as depreciation, wear and tear, mechanical problems, cosmetic blemishes, and supply and demand in the local area are considered when calculating ACV for a car.

While ACV coverage offers a lower premium than replacement cost coverage, it provides less protection and may require the policyholder to pay out of pocket to replace their belongings.

Replacement cost value (RCV)

RCV, or Replacement Cost Value, is the amount it will take to replace your property or belongings without any deduction for depreciation. In other words, it is the full cost to replace your items with new ones.

RCV isn't always available for car insurance. However, if it is an option for you, it can help guard against depreciation. For example, if you buy a new car for $25,000 and it is totaled on the way home from the dealership, you would only be able to recover around $20,000 (minus your deductible) from your insurance company. With RCV, you can recover the full $25,000.

Please note that your premium will likely increase if you opt to be covered for your car's RCV.

Who offers RCV for auto insurance?

Not all insurance companies offer RCV for auto insurance. Among the major insurers in the United States, new car replacement coverage is available at:

• American Family Insurance
• Erie
• Farmers
• Nationwide (through Allied)
• Liberty Mutual
• Allstate
• Travelers
• USAA

Whether RCV is worth it depends on your personal preference and financial situation. RCV increases the cost of your policy, but the payout amount you will receive from your insurer will be higher in the event of a covered loss. If you are worried about depreciation and want to ensure you can replace your vehicle with a new one, RCV may be a good option for you.

Gap insurance

Here's how it works: when you buy a new car, it starts to depreciate in value as soon as it leaves the dealership. Standard auto insurance policies will only cover the depreciated value of the car, which is its current market value at the time of a claim. This means that if your new car is totalled in an accident, your insurance payout may not be enough to cover the remaining loan amount.

This is where gap insurance comes in. It covers the "gap" between the depreciated value of your car and the amount you still owe on your loan. For example, if your car is worth $20,000 but you owe $25,000 on your loan, gap insurance will cover the $5,000 difference, minus your deductible. This ensures that you don't end up paying for a car that you can no longer drive.

The cost of gap insurance varies but is generally inexpensive, with auto insurers typically charging a few dollars a month or around $20 a year. However, if you choose to finance gap insurance through your dealer, it will be added to your loan amount and you will pay interest on it, increasing the overall cost.

Depreciation

How Depreciation Works

Several factors determine a car's ultimate value, including its initial price, age, vehicle type, vehicle colour, vehicle features and modifications, accident history, mileage, make and model, overall vehicle condition, and local selling prices for similar cars.

Insurers' Use of Depreciation

Insurers use depreciation to calculate a car's actual cash value (ACV), which is then used to determine claim payouts in total loss cases and make other evaluations. In the event of a covered claim, collision and comprehensive insurance may replace your car if it is damaged beyond repair. However, insurers typically only pay out the ACV of the car, minus your deductible, rather than the amount needed to buy the same car in a newer model or make.

Diminished Value Claims

When a car is involved in an accident, its market value decreases even if it is restored to its pre-accident condition following repairs. This decrease in value is known as diminished value, and it can be claimed through insurance. There are three types of diminished value:

• Inherent diminished value: The most common form, it occurs when a vehicle loses value due to its history of damage, indicated in car history reports.
• Immediate diminished value: Represents the difference in resale value immediately after an accident and before repairs are made.
• Repair-related diminished value: Refers to the loss of value due to low-quality or improper repairs, including the use of aftermarket parts instead of original equipment manufacturer (OEM) parts.

To file a diminished value claim, it is important to document the car's market value using tools like the Kelley Blue Book or NADA calculator, prove the car's diminished value with photos, documents, and appraisals, and satisfy all the insurance company's conditions for the claim.

New Car Replacement Insurance

New car replacement insurance is an option offered by some insurers that pays the value of a brand-new car of the same make and model if your car is declared a total loss. This type of coverage is only available if you also purchase collision and comprehensive insurance, and it usually comes at an additional cost. It is worth considering if you want peace of mind that your new car is protected, as it can help you avoid the financial loss associated with a car's quick depreciation.

Frequently asked questions