After driving your new car off the auto sales lot, you’re probably extra cautious about keeping it neat and clean on the inside and damage-free on the outside. Nothing would be more devastating that getting into an accident shortly after purchasing a new car. Insurance companies recognize the difficulties placed upon owners who have had their new cars totaled, and offer policies to cover the expenses. But, what is new car replacement insurance? It is coverage for newer cars that pays for the cost to purchase a replacement vehicle of the same make and model.
New Car Replacement vs. Collision and Comprehensive Insurance
There are many car insurance policies available. Sometimes, it can be difficult to know what to purchase, or what might be required by your state. State lawmakers are most concerned with liability insurance and will require you to have a policy. If you have a collision, liability insurance will help to cover the costs associated with the damages and injuries caused to the other car and its passengers. If you also want coverage for your own car, then you need to purchase collision insurance. This policy will pay for damaged caused to your car in an accident, while comprehensive insurance will cover damage from other causes like bad weather and vandalism.
Now, imagine that you are involved in a collision shortly after you purchase a new car. If you are like most car buyers, you didn’t write the car salesman a check for the entire agreed-upon price. Instead, you paid a portion of the costs and took out a loan for the rest. On a $30,000 car, you still owe $20,000 at the time of your wreck. Unfortunately, your insurance company deems the car a total loss. This means that the cost to repair the damages is equal to a large percentage of the actual value of the car (that percentage depends upon your insurance company’s standard). Let’s look at your options:
Option 1: If you only have liability insurance, you will not receive any financial assistance from your insurance company. Remember, liability insurance only helps to cover the cost of the damages to the other cars involved in the collision. This means that you still have to pay the bank back for the $20,000 you still owe on the car. Plus, now you don’t have a vehicle and will probably have to buy another one, making your out-of-pocket costs for the accident far higher than if you had collision or new car replacement insurance.
Option 2: If you have collision insurance, your insurer will determine the actual cash value (ACV) of your car. This is the value of your car at the time of the accident and not what you originally paid for the vehicle. Instead, the ACV takes into account depreciation. Even with a newer car, it can be worth thousands less as soon as you drive it off the lot. In this scenario, your insurer determines that you car is worth $21,000. Minus your $1,000 deductible, and your insurance company would send a check for $20,000. This is the exact amount you still owe the bank for your car loan.
Unlike Option 1, you now have a smaller financial burden because you no longer owe the bank anything for your first car, but will still have to pay to purchase a new car, if you so choose. Keep in mind that the $20,000 check sent by the insurance company will either go directly to the bank that owns your car loan, or the check will have both your name and the bank’s name on it and require that you send it to the lender.
There may be a situation in which your insurer determines that the ACV of your car is less than the amount you still owe to the bank. For example, the ACV might only be $15,000 and you still have a $20,000 loan. In this instance, the bank still receives the $15,000, but you also owe the bank the remaining balance of $5,000.
Option 3: If you have new car replacement insurance, then you do not need to worry about depreciation. This policy is designed to help those car owners who recently purchased a vehicle and have totaled it in a wreck. New car replacement means exactly that: your insurer does not pay you for the ACV of your car, but instead will pay you the amount for a new vehicle that is the same make and model.
There are several insurance companies that offer new car replacement insurance. Each has its own requirements and stipulations. For each, you must also have collision and comprehensive insurance first before being able to also have a new car replacement policy. Second, you will still have a pay a deductible before the insurer will provide you with a payment for the replacement car. Also, this policy is for newer cars only. Depending upon the insurer, coverage could range from protection for cars under a year old to up to five years old.
New Car Replacement vs. Gap Insurance
If you are hesitant to spend the money on a new car replacement policy, or your newer car has aged out of the policy requirements, then you might want to consider gap insurance. This type of policy will help to cover the difference between the ACV of your car and the amount you still owe. For example, if the ACV is only $15,000 and you have a $20,000 loan, you would still owe $5,000. If you only had collision insurance, you would be left paying that amount out of pocket. With gap insurance, the $5,000 would be covered. In some cases, gap insurance will also pay your deductible.
To determine what type of policy is best for you, speak with your independent insurance agent. They can recommend a policy based on your unique financial situation. You can also ask yourself what you can afford in the event of a total loss. Considering the above scenario: Can you afford to pay the $20,000 bank loan plus the cost of a replacement car? Then, maybe liability insurance is all you need. Can you afford to pay the difference between the ACV of your car and the amount owed to the bank? Then, maybe liability and collision insurance is all you need. If you want additional financial protection, then consider new car replacement (if the vehicle qualifies) or gap insurance.
What to Do If Your Car is Totaled
Before your car is totaled, be prepared. Speak with an independent agent so that you know exactly how much coverage you have in the event of a total loss. Understand the terms and conditions of your policy so that you know how to proceed knowledgably and with confidence after the accident happens. This also means finding out if you have car rental coverage. Totaling a car is devastating for many reasons; if you don’t want to get stuck paying for taxis or finding last-minute carpools for work or school, you will want to rent a car. Many policies offer coverage for renting a car while you go through the repair or replacement procedures with the insurer.
In addition to knowing the details of your car insurance policy, you should also have a good idea of the value of your car prior to an accident. There are various industry websites that provide information about car values based on the make, model, year, and condition. Make sure to include any accessories you had added at the time of purchase or any aftermarket parts like a speaker system, navigation package, or custom fenders. You can then provide that information to the insurer in order to come to an agreement about the ACV of your car.
After the accident, call your insurance company to begin the claims process. They will need to determine if your car is a total loss, and will inform you of their decision. Then, they determine the ACV. You can speak with the insurance agent or adjuster if you have any questions or concerns about the valuation. Then, you can decide whether to have the insurer salvage the car and proceed with payment or if you want to keep it and try to have it fixed.
Speak to An Agent
Whether it’s before an accident or after, speak with your independent insurance agent about your insurance policy. They can help you navigate the options and restrictions or your particular coverage and can go into additional detail about the differences between liability, collision and comprehensive, new car replacement, and gap coverage. With their knowledge and experience, you can select the plan that works best for you.
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