Is New Car Replacement Coverage Worth It?

By Catherine Powell

Image courtesy flickr

There’s nothing like owning a new car.  That new car smell, the cutting-edge technology, and the pride of ownership are things that are bound to get your pulse racing almost as fast as redlining the engine.  And why not?  With an average cost of $31,455 in 2018, buying a new car is as expensive as buying a house was to many of our parents.  Of course, back before the turn of the century the most high-tech piece of hardware in most cars was a cd-player.  Now vehicles come equipped from the factory with everything from satellite radio and GPS to touchscreens and backup cameras.   With that kind of investment, you want to make sure that your pride and joy is protected from any foreseeable damage, as well as being able to replace your new car with a similar make and model should it get totaled.

Ready to hit the road?

Most drivers believe that should their car wind up as a total loss due to accident, theft, flood or other act of God, their insurer will gladly pony up the funds to drive an identical model off the dealer’s lot.  Unfortunately, this isn’t the case with a standard auto policy.  That’s because if you read the fine print, you’ll discover that the standard policy only pays out the fair market value of your vehicle should it be declared a total loss.  The problem is once the wheels leave the dealership and hit the road, your brand-new vehicle depreciates by several thousand dollars. 

That means if you park your new Lexus at your office or the mall an hour after you buy it only to discover it’s been stolen, your insurer won’t cover the cost of its replacement.  Or, should that new Toyota Camry you bought a year ago for $25,000 wind up being flattened by a tree that falls during a thunderstorm, you’ll be shocked to learn that your insurer will only give you $17,500 for its loss, minus your deductible.  This may or may not be sufficient for you to acquire the same make, model, mileage and options that you enjoy in your current Camry.  Does that mean you’re out of luck?  Not necessarily.

New Car Replacement Coverage to the Rescue

Image courtesy pxhere

Realizing that many Americans love their cars almost as much as they love their pets, insurance companies created an add-on that can be applied to cars that are 1-3 years old.  Called new car replacement coverage, for just a few dollars more per year, what insurers are willing to do is to ease the pain of owning a new car by being willing to cover the replacement cost.  Think about it, instead of being issued a check for $17,500 for that one-year-old Camry, your insurer would give you a check for a new Camry minus your deductible.  The catch? This offer only applies during the first few years of ownership and you also have to carry collision and comprehensive insurance on your vehicle as well.  The other catch is that not all insurance companies offer it.  Even if they do, it isn’t available in all 50 states.

How much does it cost?

While prices vary from one insurance company to the next, the average cost of obtaining new car replacement coverage is usually only around 5%.  That means if you’re currently paying $100 per month for your current coverage, the difference should only amount to an extra $5 or so per month.  Since the depreciation of a new car is typically 20% or more in the first year, this small extra investment of $60 or so per year could pay huge dividends should the worst happen to your new ride.

Don’t confuse new car replacement coverage with gap coverage.

Image courtesy pexels

Another available add-on to auto policies is something called gap coverage.  If you opt for this don’t expect your insurer to stroke you a check to help you buy a new car should yours be totaled.  Gap coverage is designed to help you pay off your car loan, not buy you a new car.  Think about what would happen if your new car was totaled and you still owed $25,000 on it.  Once you factor in depreciation, if your insurance company tells you that they’re only willing to issue you a check for $17,500 which is the current value of your car, minus your $500 deductible, not only wouldn’t you be able to buy a new car, but you’dstill owe the bank $7,500 on your current one.  This would leave you with no ride along with a big chunk of change to pay off before you can start shopping for a replacement.  Add to this if you don’t satisfy your current lender, good luck securing financing for another vehicle.

That’s the bad news.  The good news is that gap insurance is another add-on that doesn’t add up to much every month.  Plus, you can overlap new car replacement coverage with gap insurance as your car ages until your car loan is paid off.  It’s what’s called a win-win situation.

Before you opt-in for new car replacement coverage or gap coverage, consider the following:

      1.      Talk to your insurance agent so he or she can help you shop both add-ons.

      2.      Make sure you understand the terms and conditions of both before you opt-in.

      3.      If you’re thinking about skipping either, make sure you have enough savings to pay off your loan and come up with a down payment on a replacement vehicle.

      4.      Make sure you keep track of your vehicle’s mileage and age, so you don’t wind up paying for either after they’ve lapsed.

What’s the difference between new car replacement coverage and better car replacement?

A derivative of new car replacement coverage has popped up recently called better car replacement.  Like new car replacement coverage, what better car replacement does is offer to up the ante should your car be totaled during the first few years of ownership.  The difference is that instead of stroking you a check for a new car, better car coverage offers to buy you an identical make and model that’s one year newer with 15,000 miles less on the odometer.  That means if you currently drive a 2018 Honda Accord with 30,000 miles on it, the insurer agrees to give you a check equivalent to the cost of a 2019 Accord with 15,000 miles minus your deductible should your current vehicle be totaled.

The bottom line is if you value your new car, these reasonably priced add-ons could make sure that your pride and joy doesn’t turn into a money pit in the next few years.

Catherine Powell is the owner of A Plus All Florida, Insurance in Orange Park, Florida.  To find out more ways to save on flood insurance, check out her website at http://aplusallfloridainsuranceinc.com/