What Is New Car Replacement Insurance & How Does It Work?

New car replacement insurance covers the cost to buy a new car of the same make and model if your vehicle is totaled in an accident. Insurers base payment on the vehicle's full price — without considering depreciation — minus your deductible.

While this coverage can be beneficial, it may not be for everyone. Typically, it’s best for drivers with brand-new cars or luxury cars. If you want to buy this coverage, most insurance companies require that you purchase it within six to 18 months of buying your new vehicle.

• What Is It?
• How It Works
• Cost of Coverage
• Gap Insurance vs. New Car Replacement
• Better Car Replacement Insurance vs. New Car Replacement
• Is It Worth It?
• Companies That Offer New Car Replacement Insurance
• FAQs

Generally, insurance payout tends to be much less than people expect because of how quickly cars depreciate.

Getting auto insurance with new car replacement can benefit some drivers, especially those who own a recently bought new car. With this coverage, you’ll be paid enough to buy a new vehicle of the same make and model after a total loss.

New car replacement insurance is ideal for people who want to protect the value of their car through the first year of ownership. This coverage ensures you won’t have to downgrade to a less valuable vehicle if your vehicle is totaled shortly after buying it.

Say you bought a new car for $30,000 and purchased new car replacement insurance. After a few months, this car’s value depreciated to $26,000, and you got into an accident that caused total damage. New car replacement coverage would help you get a payout high enough to buy a new car of the same make and model ($30,000) instead of receiving a payout equal to your car’s current worth, or $26,000.

Understanding how new car replacement insurance works can help you determine if it’s right for you. Generally, this coverage applies if your vehicle is declared a “total loss” after an accident. In this instance, you’d be refunded your vehicle’s full cost — without counting depreciation — minus your deductible. If you don’t have this coverage, you’ll only receive your car's actual cash value (ACV), which considers depreciation.

For example: if your car costs $30,000 brand new and you get into an accident after a few months, your insurance will only pay the ACV if you don’t have new car replacement coverage. If your car’s value has depreciated to $26,000, that’s how much you’ll receive from your provider. In this case, you’d have to cover the remaining amount necessary to buy a similar car or downgrade to a lower-cost vehicle.

It’s important to note that there are restrictions and requirements on new car replacement insurance. For instance, insurance companies require that you have full coverage car insurance. There’s typically a window of time after purchasing a new car when you’re allowed to get this coverage, but this window varies among providers. Be sure to reach out to your insurance company for more information.

The cost of new car replacement insurance varies depending on your vehicle, provider, location and unique driver profile. Some companies add a surcharge to your original policy’s premium for this coverage, such as an additional 5%. Others provide this coverage at no extra cost. It’s best to get a personalized quote from all the companies you’re considering to see how much this coverage could cost you.

There are a few different coverage options available to drivers with newer vehicles. New car replacement insurance pays out the cost to replace your car with a similar make and model.

Gap insurance offers similar coverage. However, instead of paying your vehicle's entire original purchase value, gap insurance covers the difference between what your vehicle is currently worth the amount you have left to pay off on your car’s loan.

In some cases, gap insurance saves you more money in the long run. It may also be available for more years than new car replacement, which is good if you are financing your car. The best way to find out is to compare quotes from different providers.

It’s important to note that it is not possible to combine these two coverages. Depending on your circumstances, you may also opt to skip getting both. However, if you’re still paying off a car loan and don’t buy gap insurance, make sure you have enough savings to repay a lender if the car is totaled and make a down payment on another vehicle.

When choosing coverages for a new vehicle, you may also come across better car replacement insurance. While new car replacement and better car replacement insurance are meant to cover the cost of replacing a car, the coverage that’s right for you will depend on your needs.

New car replacement insurance is typically only available for new cars less than a year old. On the other hand, better car replacement coverage can be purchased for older cars and typically replaces your vehicle with a comparable, newer model. However, the exact terms of this policy can vary depending on your provider.

It’s also important to keep in mind that only a few companies offer better car replacement insurance, including Erie, Liberty Mutual and Selective.

Choosing better car replacement insurance can allow you to upgrade your car if it’s totaled in an accident. However, it's worth noting that combining new car replacement and better car replacement coverages is not possible.

You may also choose to skip both of these insurance options. However, if you do, it’s still crucial to make sure you have enough insurance coverage to purchase a new vehicle if yours is deemed a total loss in an accident.

New car replacement insurance is not for everyone. Depending on your circumstances, it may not be necessary.

Generally, new car replacement insurance is an excellent option if your car is brand new. Drivers with luxury cars can also benefit from this coverage because the value of luxury and electric cars tends to depreciate faster than average.

New car replacement insurance is likely unavailable to you if you drive an old car. It may also not be beneficial if you drive a new, low-value car. You could pay more in additional insurance coverage than your car is worth in this case.

Choosing insurance with new car replacement is also not common in the United States because most people buy used cars. In 2020, approximately 39.3 million units of used light vehicles were sold in the U.S.; only around 14 million new light trucks and cars were sold in the same year.

Finding new car replacement insurance can be fairly simple. Of the biggest insurers in the country, 24 offer this coverage. In most cases, the car must be one to two years old or have less than 15,000 miles to be eligible for this coverage.

MoneyGeek analyzed quotes and policies from insurance companies that offer new car replacement insurance. Allstate ranked first overall after getting the highest ranking in 40 states; Farmers came in second.

Better car replacement insurance allows the policy owner to upgrade their vehicle to a newer model after their original car is declared a total loss in a covered accident. This coverage is sometimes considered an improved version of the new car replacement insurance. In most cases, you can get a vehicle that’s one or more model years newer than your totaled car.

Three companies currently offer better car replacement insurance: Erie, Liberty Mutual and Selective.

Finding the right coverage for your new car depends on your circumstances and needs. MoneyGeek answers some frequently asked questions to help you determine if new car replacement insurance is right for you.