Should you buy new car replacement insurance?

New car replacement insurance negates depreciation for settlement payouts. You should carry new car replacement insurance in addition to comprehensive and collision coverage for valuable new cars.

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A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Jan 19, 2021

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Here's what you need to know...

  • New car replacement insurance is designed to recoup losses usually impossible to recover due to depreciation
  • Collision and comprehensive insurance may be required in order to add this unique coverage
  • A settlement received through new car replacement coverage could fully pay off the loan on a totaled vehicle

Buying a new car is often a very exciting experience. The uniqueness associated with traveling around in a new car does make driving invigorating.

Dreams, sadly, are too frequently shattered by reality. Even newly purchased vehicles can and do end up in serious accidents. Neither the hands of fate nor the negligence of a careless driver knows nor cares about the newness of a vehicle.

Accidents are accidents and damage is damage. Both can be inflicted upon a brand new car within the first year of purchase. And yes, the car could end up outright totaled.

A glimmer of hope emerges from this sober assessment. Purchasing “new car replacement” insurance may be the best way to recover any losses incurred due to the vehicle being totaled.

The odds of a new car being totaled do seem kind of slim. So, is this type of insurance really worth purchasing, though?

Compare coverage options and rates by entering your zip code into our free rate comparison tool above.

Coverage Against Major Losses

New car replacement insurance may seem somewhat redundant to those who already purchased an insurance policy with collision and comprehensive insurance. Both of these coverage delineations are designed to pay for damages inflicted upon a driver’s car.

  • Unlike liability insurance, collision claims are filed by the policyholder when he/she is at fault for the accident.
  • Comprehensive covers a massive range of perils not involving at-fault or no-fault accidents. If a natural disaster damages a car, this would be one situation in which comprehensive insurance comes in to address the loss.

Other insurance options exist to cover losses. Uninsured motorist coverage comes into play if a driver lacking insurance were to cause an accident. And the damage could very well be beyond the worst imagination of a driver.

Among the most terrible things that can happen is to see a vehicle end up totaled.

A “total loss” means the insurance company feels the damage to the vehicle is more than what the car is worth. As such, the insurance settlement would be the market value of replacing the vehicle.

So, this brings us to the question, why buy new car replacement insurance when the vehicle may already be covered under any one of a number of other insurance categories? The reason is the vehicle might not be as covered as assumed.

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Why new car replacement insurance?

Comprehensive, collision and uninsured motorist pay out based on two very key words “market value.”

With depreciation, the payout on the car is going to be below what the buyer originally paid. A new car that is a year or two old may have a nice resale value, but the resale value won’t be the same figure the buyer paid.

Things get a little complicated when the amount left on the car loan balance is more than what a traditional insurance company’s total loss payout. The remaining balance is not going to be forgiven by the lender.

The borrower still has to pay the remaining balance, ruined vehicle or not. One way to cover the difference would be to purchase gap insurance. The other is new car replacement insurance.

With new car replacement insurance, the settlement payout is going to be more generous. Depreciation means nothing as far as new car replacement insurance is concerned so the recovery amount on the settlement should be enough to pay for all losses.

To say this is a good deal for the insured would be an understatement. Actually, the insurance company also gains a nice benefit from making this type of coverage available.

The chances of the insurance company actually needing to pay out on a total loss are rare. While drivers are always at risk of an accident or another mishap, the odds of a total loss scenario occurring with a newly purchased car are low.

The odds are not zero. A total loss can happen at any time. The possibility exists. So, investing in new car replacement insurance might put concerned drivers’ worried minds to rest.

Points about Comprehensive and Collision Insurance

Due to the specialized nature of new car replacement insurance, additional terms may be in place when interested in making a purchase. Buying collision and comprehensive insurance, for example, may be required.

Collision and comprehensive insurance are not mandatory, as is the case with auto liability insurance or, possibly, personal injury protection. Drivers are under no legal obligation to cover damage or losses to their own car.

With proper comparison shopping, maybe the overall cost of the policy might prove to be reasonable.

Be sure to look at all the requirements for acquiring such a policy. New car replacement coverage might only be in effect for a specified number of years. The first two or three years could be the term for the coverage. Shopping around to get the right terms makes sense.

Assemble a Great Policy

Shop around prudently and request quotes. This has to be done in order to get the right policy in place.

Putting together a great insurance policy with all sorts of coverage options can be quite affordable when comparing numerous quotes. Adding new car replacement insurance on top of several other helpful coverage plans could come with low rates and exceptional coverage.

New car replacement insurance can be part of the mix. Amazingly, the overall premium price may be incredibly affordable even with significant added coverage and “maxed out” liability amounts.

Compare car insurance quotes today to find the coverage you need at the best rate!

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