Many people have been adding “new car replacement” onto their insurance policies, without really understanding what this type of insurance does or how they can use it if they are in an accident. It sounds like a great deal: if you are in an accident where your vehicle is broken to the point of being unusable and the repairs will cost more than the car is actually worth, you can just get a new car, and the insurance company will cover it, right? This isn’t exactly true.
The Car Is Totaled
If the car has been totaled (meaning that the insurance company and the repair shop agree that the costs of the repair will be more than a huge percentage of the car’s value), this will usually trigger new car replacement insurance. What percentage actually the repairs have to amount to depends on the insurer, but it is usually around 75%. In short, if the car is so damaged that it is not even worth fixing it, the insurance company will pay out for a new car, except for your standard deductible.
Guards against Depreciation
You already know that your car loses value the moment you drive it off the lot. It continues to lose its value the longer that you drive it. If you have collusion insurance and comprehensive insurance, new car replacement insurance is a great way to make sure that if your car is completely totaled, that you have the opportunity to afford a new car. While you might receive a payout from your insurance company even if you do not have new car replacement, that amount will usually not be large enough to help you buy a new vehicle. You do not have to worry about the total value of your car when it is totaled, because the policy provides for purchasing a new, or at least newer, model.
How Does This Differ from Gap Coverage?
Gap insurance is insurance specifically purchased to protect you if you total a brand new car that you are leasing or buying soon after buying it. Because of how a car depreciates, you may owe more on that vehicle than it is worth. Gap insurance covers that amount so that you get a reasonable payout if the car is in an accident and is non-functional.
