If you have recently purchased a new car in the United States, you have likely felt the financial pinch. That’s because new vehicle prices have soared heavily in 2025. The May 22nd Edmunds report explains that in the first quarter of 2025, the average price for a used car under three years old topped $30,000 for the first time since 2023. If your new car is totaled or stolen early on, you could face a major financial loss because of heavy depreciation.
That’s why many smart drivers choose new car replacement insurance. Standard insurance depreciates your car’s value, while car replacement coverage lets you replace it with a brand-new model.
If you’re financing or leasing a new car, understanding how car replacement insurance works can save you thousands of dollars and time.
Listed below is a breakdown of car replacement coverage and key differences between car replacement, standard, and gap policies.
What Is Car Replacement Coverage?
Put simply, car replacement insurance is an optional add-on to your auto insurance policy, and can be claimed once your vehicle is declared a total loss and undrivable. With standard insurance, the insurer would reimburse you for your car’s actual cash value (ACV) or the market price of that current condition.
With car replacement insurance, you can replace your vehicle with a brand-new model. This insurance is designed to fill the gap so you can get financially compensated for what you originally paid.
Standard Comprehensive/Collision Insurance
Standard policies reimburse you the ACV, which is the actual cash value or current market value. Mileage, demand, and condition can highly influence the depreciation rate.
According to an article published on Optiom in 2024, on average, a new car can lose about 20-30% of its value within the first year and up to 50% by the third year. This leaves you with a much lower payout on your car’s value despite purchasing it at a high cost.
Note: Also, unlike new car replacement, through insurers offering ACV, you are only eligible for a cash payout.
Gap Insurance
Gap insurance covers the difference between the loan/lease balance and the ACV payout. In simple words, it covered the loan deficit. For example, if you owe 17,000 and your vehicle’s ACV is 15,000, gap insurance could cover the $2,000. However, if you’ve already paid off most of your loan and your car is worth more than what you owe, there may be no gap left to cover. In this case, you’d be paying for coverage that doesn’t benefit you.
Note: If you don’t have negative equity, where you owe more than your car’s value, gap insurance can end up costing you without offering real benefit.
Car Replacement Coverage
A new car replacement covered the full cost of a brand new vehicle of the same model (minus your deductible). For instance, if your $35,000 car depreciates to $28,000 and is totaled, this coverage helps you replace it with a new $35,000 car.
Most new owners of the car, especially in the 1-2 years when vehicle depreciation is steep, are more likely to take the new car replacement insurance. That’s why this coverage is mostly popular amongst new car owners, when vehicles lose value more rapidly. In case any incident happens, this coverage guarantees that they will get a replacement car close to what they purchased.
Who Offers Car Replacement Insurance?
Luckily, several major U.S. insurers include new car replacement coverage as part of their plan (some with standard and some with full coverage as well as optional add-ons). However, the terms and conditions can vary based on each state. Listed below are some of the major insurance companies that offer new car replacement coverage.
Liberty Mutual
Eligibility: Provides coverage for vehicles less than a year old and under 15,000 miles on the odometer.
Coverage terms: Offers standard new vehicle replacement, plus an optional “Better Car Replacement,” which allows you to receive a one-year newer vehicle with lower mileage. Some drivers might choose this option if they’re looking for the best and quickest way to get a new car replacement.
Quick Take: Great for drivers who are comfortable upgrading to a newer, lower-mileage vehicle if their vehicle gets totaled or stolen in an unfortunate situation.
Travelers
Eligibility: Covers vehicles up to five years old as long as you’re the first owner.
Coverage terms: Provides you with a replacement of a brand new car of the same make and model. Also includes gap coverage for any remaining loan balance and offers reduced deductibles for glass claims.
Quick Take: This program is ideal if you’re looking for extensive protection (up to 5 years) and extras included in your policy.
Allstate
Eligibility: Available for vehicles that are two model years old or newer.
Coverage terms: Unlike other plans, this coverage is automatically included with Allstate’s full-coverage policies.
Quick Take: This option is perfect for drivers who want easy, hassle-free car replacement protection bundled with their existing full-coverage policy.
Benefits of Car Replacement Insurance
According to an article published in Kryderlaw, in Illinois, a car is considered a “total loss” if the sum of repair costs and scrap value surpasses the vehicle’s pre-accident market value.
That’s why, for new vehicle buyers, adding new car replacement insurance to your policy is a wise way to protect your insurance and peace of mind. Listed below are some key advantages to consider.
No Depreciation
As discussed above, standard car insurance pays you Actual Cash Value (ACV), which favours depreciation. Since new cars lose about 20% of their value in the first year, that could mean thousands less compared to what you paid.
Complete Financial Protection
When your vehicle is totaled or stolen, the amount you get from standard insurance is not enough to replace it with a comparable vehicle. On the other hand, car replacement insurance covers the full cost of a brand-new car of the same make and model. Think of it as a way to fill your financial gap to help you avoid out-of-pocket losses.
Simplified Claims Process
Dealing with depreciation is frustrating and often results in lowball offers that drag into negotiations, further delays, and disappointments. However, with car replacement insurance, you experience a smoother, transparent experience.
Extended Eligibility with Certain Providers
It’s true that most insurers limit coverage to the first year. However, many insurers stand out with more flexible terms and benefits.
For example, Travelers extends eligibility up to five years and even includes extra perks like gap coverage and an extended deductible on glass claims. Other insurers like Liberty Mutual, with its “Better Car Replacement” offer, give you an option to get a one-year newer, lower mileage model if your car is totaled.
Potential Drawbacks to Consider
Like everything else, the car replacement benefit comes with added cost and limitations. While it can offer you extended protection, it increases your premium by 5%-10%. Not all people are eligible to get car replacement insurance, as it highly depends on the age, mileage, and ownership rules of the car. Listed below are a few important factors to consider before adding it to your policy.
Higher Premiums
Adding this coverage means a slight bump in your insurance rates, typically around 5-10%.
Limited Eligibility Window
Many insurers only offer this protection during the first 1-3 years of purchasing the vehicle or until it reaches a certain mileage cap, often under 15,000–24,000 miles.
May Not Cover Upgrades or After‑Market Parts
If your vehicle has custom upgrades or includes aftermarket parts, your insurer may only replace it with a standard model or offer a partial payout for those additional features.
Often Must Be Added at Purchase
There is a short window to get car replacement insurance, typically when you first buy your car or start your policy. If you try to add it a few months down the road, you may face higher premiums or find that you’re no longer eligible at all. Getting car replacement insurance is best to be made when finalizing the purchase of the car.
Car Replacement Coverage Varies by Insurer & State
Before adding coverage, check the insurer’s policy and state regulations. Coverage varies based on the insurer you have selected. Some offer extended protection for up to five years (like Travelers) while others limit it to the first year or two of ownership.
Is New Car Replacement Insurance Worth It?
Still thinking about car replacement insurance? Sure, it increases your premium (5%-10%), but the small cost can save you big if your car gets totaled while it’s still new. Listed below are the pros and the cons to help you decide whether this coverage is the right fit for your needs.
When It’s Worth It
Keep in mind that new cars lose about 20% of their value during the first year. High-end models? They lose even more in just a few months. Without this coverage, you will be left worried about not getting properly compensated for the amount you put down to get the car. Instead of negotiating over a lower payout, with this coverage, you get a full replacement based on your car’s original value at the time it was purchased, not its depreciated worth.
When It Might Be Less Useful
Car replacement insurance has limits. If your car is older than 3 years and the mileage is above 15,000, you won’t qualify. Also, if you have purchased a car with a good resale value or it’s already paid off, the extra premium might not be worth it. In these cases, it may be better to skip this add-on and put that money towards savings instead.
How to Add New Car Replacement Insurance to Your Policy + Eligibility
Ready to add car replacement insurance? It’s pretty simple if you know which insurer you are going to choose and do your part of the research. You’ll need to add this add-on car insurance coverage within 30 days of purchasing your car or starting your policy. Listed below is a simple guide on how to add it to your insurance.
Make Sure You’re Covered First
To qualify, you’ll need to have collision and comprehensive coverage on your policy. These are needed for the replacement to kick on if your vehicle is totaled or stolen as part of the covered claim.
Add It Quickly After Purchase
Timing is key. Most insurers require you to add this coverage within 30 days of buying your new car. For example, the Liberty Manual typically allows up to 7-30 days, depending on the state. It’s mainly because insurers value your car based on the age, mileage, and other factors at the time coverage is added. Delayed too long may lead to standard ACV-only coverage.
Review the Details
If you have a car with premium features, check with your agent if these are covered. Clarify if the perks, like glass-deductible waivers or GAP coverages, apply. Review cost and coverage details that best fit your needs.
Select, Confirm, & Document
Confirm the plan, the start date, and provide the documents required (E.g., purchase records). Save your policy declaration page and get some copies to save it in your dashboard of the car if you need it handy.
Understanding how this coverage works can help you protect your new car and your wallet if any unexpected situation occurs.
Speak with an Insurance Navy agent today to see how you could add car replacement insurance to your policy at an affordable rate.
Insurance Navy helps drivers get the best, affordable coverage for their vehicles.
Request a free quote today, either online or over the phone at 888-949-6289. We also provide assistance in person at all of our storefronts. Reach out today and drive insured tomorrow.
