Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in...

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Reviewed by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Jul 14, 2021

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In a nutshell...

  • You may face significant financial loss if your new car is totaled within the first year of ownership
  • Auto depreciation is usually most significant during the first year after ownership
  • New car replacement coverage is optional and must specifically be requested
  • New car replacement coverage could prevent thousands of dollars of loss if your new vehicle is totaled within the first year

Between the new car smell, the brand new sheen on your paint job, the high-tech features you are still learning how to use, and the flawless appearance of your car inside and out, you understandably have a lot to love about your new car.

However, have you considered what the financial impact of a serious car accident may be to your budget and personal finances?

You may think that your existing auto insurance policy would pay for the replacement of your car if you experience a total loss in an accident, but this may not actually be the case.

Compare car insurance quotes to find the best rate for the coverage you decide you want. Use our free rate comparison tool to get started today.

Understanding New Car Replacement Coverage

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New car replacement coverage is not included on all auto policies. Instead, it is an optional endorsement that you must specifically ask for when you are shopping for new auto insurance and comparing quotes.

It will make your premium amount increase slightly, but when you compare insurance quotes, you will be able to find the most affordable deal on coverage.

With this endorsement in place, your liability auto insurance policy may not pay for any repairs on your car at all. In fact, liability coverage only pays for damages to the other parties involved in the accident.

Comprehensive and collision coverage also will not pay for the full cost of a replacement of the same make and model of vehicle if your car is totaled within 12 months of purchase.

Without new car replacement coverage, the standard policy may only pay the replacement value on your car if the vehicle is totaled.

Because of the effects of depreciation, there is a good chance that you could lose thousands of dollars or more if your car is totaled within the first year and you do not have new car replacement coverage.

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Analyzing the Effects of Depreciation on Your Vehicle

To understand the true benefit associated with comparing rates for a new car replacement endorsement on your auto insurance policy, you need to understand the effects of depreciation on your car.

A typical car will lose approximately nine percent of its value as soon as you drive it off of the dealership’s lot. With a $30,000 vehicle, this percentage equates to a $2,700 decrease in value.

Within a year, that new car will typically lose 19 percent of its value.

This percentage is a reduction in value of $5,700 on that same car. If your car is totaled within this period of time, a standard auto policy may only pay $24,300 to you to replace a practically new car.

Unfortunately, you may have a much larger auto loan to pay off. You may not have enough money from the auto claim to pay off your loan or to make a down payment on a new car.

Your car accident could potentially cost you thousands of dollars or more because of the effects of depreciation.

Determining If You Need New Car Replacement Coverage

Are you trying to determine if you need to add new car replacement coverage to the quotes you are requesting from different insurance companies?

  • First, consider the amount of your down payment.
  • Second, use a depreciation calculator online to estimate the value of your car after a year.
  • Third, use a loan payment calculator with an amortization schedule to determine how much money you will still owe on your car loan after a year.

If you compare all of these figures and determine that you will be in the red if you get in a car accident within the first year, you need to request a new car replacement coverage endorsement.

Even if your calculations do not determine that you will be in the red, you may still not want to endure the financial loss associated with a car accident in your first year of ownership.

New car replacement coverage can benefit anyone who purchases a new car regardless of whether you have an auto loan or not.

The Difference between New Car Replacement and GAP Coverage

New car replacement insurance may sound similar to GAP coverage, and you may be wondering how these two options are different. New car replacement coverage only covers the first year of ownership. After the first year, this coverage ceases.

GAP coverage will pay up to a certain percentage of the car’s current value at the time of the accident. For example, you may buy a car insurance policy that includes 120 percent GAP coverage.

If you total your car that has a replacement value of $20,000 in your third year of ownership and you still owe $22,000 on your loan, the GAP insurance will pay your outstanding loan balance off in full. GAP coverage may remain in place until your loan is paid off.

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Adding New Car Replacement Coverage to Your Current Policy

Now that you know more about the incredible benefits associated with new car replacement coverage, you may see why this is an optional coverage that you do not want to live without.

The good news is that this is usually a rather affordable endorsement to add to your vehicle, but you should compare rates to find the best coverage for your needs.

In addition, the coverage usually will terminate after one calendar year from the date you purchased the car. However, you should make a note on your calendar to call your insurer and to ensure that you are not charged for this additional coverage that no longer benefits you.

Many people purchase new cars each year with the false assumption that their comprehensive auto insurance policy will provide them with the full protection they need.

New car replacement coverage usually is not added to your policy unless you specifically ask for it. Therefore, ensure that you request this beneficial coverage when you are shopping around for competitive rates.

Enter your zip code below to find and compare rates right now.