Replacement Auto Insurance: When To Start Coverage?

New car replacement insurance is an optional add-on to your auto insurance policy that covers the cost of replacing your brand-new car if it is stolen or totaled in an accident. This type of insurance is worth considering as vehicles can lose a significant amount of their value during the first few months of ownership. In the event of a total loss, your standard auto insurance policy will only cover the depreciated value of your vehicle, leaving you with a financial burden if you want to replace it with a new car of the same make and model. New car replacement insurance fills this gap by reimbursing you for the full value of a new car, minus any applicable deductibles. This type of insurance is especially useful if you have an expensive car, face a higher-than-usual risk of accidents, or own a vehicle that depreciates quickly.

When to get new car replacement insurance

New car replacement insurance gives you peace of mind by protecting you from financial loss if your new vehicle is declared a total loss. This type of insurance covers the cost of replacing your brand-new car with a new vehicle of the same make and model if it is stolen or damaged beyond repair within the first few years of ownership.

• When you buy a new car: New car replacement insurance is most beneficial when purchased alongside your initial car insurance policy. This ensures you are covered from the start and don't have to worry about gaps in coverage.
• When you want protection against depreciation: Cars can lose over 10% of their value in the first few months of ownership and over 20% in the first year. New car replacement insurance shields you from this depreciation by providing funds to purchase a new car of the same make and model, rather than the depreciated value of your totaled car.
• When you want peace of mind: Accidents, theft, and natural disasters can happen at any time. Knowing that you have new car replacement insurance can give you peace of mind and help ease the stress and financial burden if something unexpected happens to your new vehicle.
• When you have a costly car: The higher the cost of your new car, the more sense it makes to invest in new car replacement insurance. This is because the difference between the car's initial cost and its depreciated value after a few months or years is likely to be significant, making the higher insurance premium worth it.
• When you are at a higher risk of accidents: If you live in an area with high traffic or adverse weather conditions that increase the risk of damaging your car, new car replacement insurance can provide valuable protection.
• When you have a car that depreciates quickly: Some vehicles, such as luxury or sports cars, depreciate more rapidly than others. If you own a car that is expected to lose value quickly, new car replacement insurance can help you avoid taking a significant financial hit if your car is totaled.
• When you want to avoid a financial bind: Without new car replacement insurance, you may be left with a claim check that is less than what you paid for the car, especially if it is totaled soon after purchase. This can put you in a difficult financial situation, having to pay the difference out of pocket to replace your car.

How new car replacement insurance works

New car replacement insurance is an optional add-on to your car insurance policy that covers the cost of replacing your vehicle with a brand-new car of the same make and model if your car is stolen or totaled within the first year of ownership, or before you reach a certain mileage (often 15,000 miles). This type of insurance is especially useful if you've purchased an expensive car as it can lose up to 10% of its value within the first few months of ownership.

To be eligible for new car replacement insurance, you typically need to have comprehensive and collision insurance on a brand-new vehicle. Comprehensive insurance covers issues like theft, environmental damage, and vandalism, while collision insurance reimburses you for vehicle repairs from an accident, regardless of who is at fault.

The cost of new car replacement insurance varies depending on factors such as your insurance carrier, driving history, and vehicle type. It usually increases your insurance policy cost by 5-13%, which is a few hundred dollars extra. While this is not an insignificant amount, it may be much less than your new vehicle's depreciation rate over the first few months of ownership.

It's important to note that new car replacement insurance is not universally available, and even among companies that offer it, the coverage may not be available in all states. Additionally, this type of insurance cannot be combined with gap insurance, which covers the difference between your car's diminished value and your remaining loan or lease balance in the event of a total loss.

New car replacement insurance vs. gap insurance

Both new car replacement insurance and gap insurance are designed to protect you financially if your car is written off or stolen. However, they do so in different ways.

New car replacement insurance

New car replacement insurance covers the cost of replacing your brand-new car if it is damaged beyond repair or stolen. This type of insurance reimburses you for the vehicle's full value, minus any applicable deductibles, so you can purchase the same make and model.

To qualify for this type of policy, you typically need to have comprehensive and collision insurance. Some policies are only valid during the first year of ownership, while others extend to two or three years and cover other situations, such as vehicle theft or a natural disaster.

Gap insurance

Gap insurance, or guaranteed asset protection, pays the difference between your car's diminished value and your remaining loan or lease balance. It doesn't apply to cars that are owned outright. For example, if you lease a car for $40,000 and get into an accident a few months later, your collision coverage may pay out $35,000, but your outstanding debt is $37,000. Gap insurance covers that $2,000 difference.

While both types of insurance cover the difference between your vehicle's original value and its value at the time of a covered loss, gap insurance doesn't provide the replacement cost of a new vehicle. New car replacement insurance is also an add-on coverage, whereas gap insurance is a standalone policy.

New car replacement insurance costs

New car replacement insurance is an optional add-on to your auto insurance policy that covers the cost of replacing your brand-new car if it is stolen or totaled in an accident. This type of insurance is especially useful if you've just bought a new vehicle, as it can depreciate significantly once you drive it off the lot.

The cost of new car replacement insurance varies depending on several factors, including the insurance company, your driving history, and the type of vehicle. It typically increases your insurance policy cost by 5-10%, which means you'll likely pay a few hundred dollars extra for it. For example, if your policy costs $1,000 a year, the new car coverage portion may add about $50.

Some insurance companies have specific requirements for vehicles to be eligible for new car replacement insurance. These requirements often include the vehicle's age, usually needing to be less than a couple of years old, and mileage, often needing to be under 15,000 miles. Additionally, some insurers require you to carry collision and comprehensive coverage in addition to the new car replacement insurance.

• Allstate: Covers cars two years old or less.
• Ameriprise: Covers within the first year of ownership or less than 15,000 miles.
• American Family: Only available for brand-new vehicles and is removed after the first policy renewal.
• Erie: Covers cars less than two years old. If the car is older, Erie pays for a comparable model that's two years newer.
• Farmers: Covers cars within the first two years or 24,000 miles.
• Nationwide: Only available in some states.
• The Hartford: Covers cars for the first 15 months or 15,000 miles, whichever comes first.
• Liberty Mutual: Covers within the first year and less than 15,000 miles.
• Travelers: Covers cars within the first five years for the original owner and includes gap coverage.

It's important to note that not all insurance companies offer new car replacement insurance, and it may not be available in all states. Additionally, this type of insurance is different from gap insurance, which covers the difference between your car's diminished value and your remaining loan or lease balance in the event of an accident.

When to cancel new car replacement insurance

New car replacement insurance is a type of insurance that reimburses you for the full value of your vehicle in the event of an accident that damages it beyond repair. This type of insurance is particularly useful if you have a brand-new car, as it can protect you from losing money in the event of an accident within the first few years of ownership.

When You Move to Another State

If you move to a new state, you will need to register your vehicle and purchase a new policy that aligns with the auto insurance laws of your new location. In this case, it is advisable to arrange for the new policy a few weeks before ending your current policy to avoid a lapse in coverage. In some states, you may also be required to surrender your license plates before cancelling your car insurance. Therefore, having a few days of overlapping insurance can help you avoid state fines.

When You No Longer Own a Car

If you sell your vehicle and do not plan on replacing it, you can cancel your auto insurance. However, it is recommended to wait until the new owner takes possession and the title is transferred before discontinuing coverage. Additionally, check with your local DMV to clarify your responsibilities regarding the license plates. If you plan on purchasing a new car within a few months, consider converting your policy to a non-owner policy to maintain coverage and avoid a possible rate increase.

When You Find a Better Deal

If you decide to switch to another insurance provider to get a better rate, it is advisable to secure a new policy before dropping your current coverage. Ensure that the start date of your new policy matches the intended cancellation date of the old policy to avoid a lapse in coverage, which can lead to higher rates in the future. It is recommended to start shopping for a new insurance company at least six to eight weeks before your current coverage expires.

When You Want to Reduce Coverage

If you own an older vehicle outright, you may consider dropping optional collision and comprehensive coverage. However, it is important to understand the risks associated with this decision. Without collision and comprehensive coverage, you will likely have to pay out of pocket for any damage or theft of your car. This would be considered a policy amendment rather than a policy cancellation.

When You Are Covered Under Someone Else's Policy

If you are a member of a household where another person has coverage and you can be added to their policy, you may consider cancelling your own insurance. This is common when individuals get married or when adult children move back home. While adding a driver to an existing policy may increase the premium, there may also be discounts available to offset the increase. Keep in mind that insurance follows the vehicle, so if you cancel your policy, you would need to add your vehicle to the other person's policy to maintain coverage.

Frequently asked questions