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Buying a new car is an exciting experience. But it also comes with the responsibility of protecting your investment. That’s where gap insurance and new car replacement coverage come in. As a car owner, you’ll want to understand the key differences between these two important insurance options.
In this comprehensive guide, we’ll explain everything you need to know about gap insurance and new car replacement. You’ll learn what each type of coverage includes, when you might need them, and how to decide which one is right for your situation.
What is Gap Insurance?
Gap insurance, also known as loan/lease coverage, is designed to pay the difference between what your car insurance pays if your vehicle is totaled or stolen and what you still owe on your auto loan or lease.
For example, let’s say you buy a new car for $20000 and finance it for 5 years. After 2 years your car gets totaled in an accident. The car’s actual cash value at that point may only be $14,000 due to depreciation. But you still owe $16,000 on your loan. Gap insurance would cover the $2,000 difference so you don’t end up owing money on a car you no longer have.
Gap insurance protects you from this potentially significant financial loss. It’s often required by lenders when you have an auto loan, since the lender wants to ensure their loan is paid off if you total the car. Gap insurance costs vary, but usually range from $400-$700 for the full term of the loan or lease.
What is New Car Replacement Coverage?
New car replacement is an optional add-on that you can purchase through your regular car insurance policy. It pays the full cost to replace your car with a new model if your car is totaled or stolen within the first year or two of ownership.
For example, if you total your new $20,000 car after owning it for only 6 months, new car replacement would pay $20,000 toward a comparable new car. This means you wouldn’t have to bear the depreciation cost on your own.
To qualify for new car replacement, your car generally has to be less than 1 year old and have less than 15,000 miles. You’ll also likely need to carry full coverage and be the original owner. This add-on usually costs $20-$40 per year.
Key Differences Between Gap Insurance and New Car Replacement
While both gap insurance and new car replacement provide valuable protections, there are some notable differences:
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What’s covered: Gap insurance pays off your remaining loan balance. New car replacement pays the full cost of a new car.
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When it’s needed: Gap insurance protects when you owe more than the car’s value. New car replacement protects against fast depreciation in the first year.
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Cost: Gap insurance costs a few hundred dollars for the loan term. New car replacement costs $20-$40 per year.
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Requirements: Gap insurance is often required by lenders. New car replacement is optional.
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Availability: Gap insurance is offered by lenders and dealers. New car replacement is an add-on through your insurer.
When to Get Gap Insurance
Here are some scenarios when gap insurance can be extremely valuable to protect yourself financially:
- You made a low down payment of less than 20%
- You took out a long auto loan term of 5-6 years
- You leased your vehicle
- You drive a car that depreciates quickly like a luxury or sports car
- You live in an area with high accident rates
Gap insurance gives you peace of mind knowing that an outstanding auto loan won’t leave you thousands of dollars in debt after an accident or theft. Even if your regular insurance covers most of the car’s value, gap insurance picks up the remainder so you break even.
When to Get New Car Replacement Coverage
Some situations when new car replacement could be worth the extra premium include:
- You bought a brand new car for $20,000+
- Your car is less than 1 year old
- Your car has under 15,000 miles on it
- You want to avoid steep first-year depreciation costs
- You plan to own your car for many years
- You want the latest model with new features
This coverage allows you to essentially “reset” your ownership costs if something happens early on. While the insurance company keeps your totaled car, you get a reimbursement for the original purchase price to apply toward a new one.
Getting Both Gap Insurance and New Car Replacement
You may be wondering if you can or should get both gap insurance and new car replacement. The answer is yes – having both types of coverage can provide comprehensive protection.
Here’s how it would work if you had both:
- Your 1 year old car is totaled and you owe $18,000 on your loan.
- Your car’s actual cash value is $16,000, leaving a $2,000 gap.
- Gap insurance pays the $2,000 difference to pay off your loan.
- New car replacement pays the original $20,000 purchase price for a new car.
- You can use the $2,000 payout from gap insurance toward your new car.
As you can see, gap insurance takes care of your outstanding loan balance, while new car replacement sets you up with the funds for a brand new car. The combo approach makes sure you aren’t left owing money or having to come up with more funds out of pocket for a replacement vehicle.
Choosing the Right Coverage For You
So when deciding between gap insurance vs new car replacement, consider your specific situation:
- How old is your car and how many miles are on it?
- What was the original purchase price and loan amount?
- How much do you still owe on your loan?
- How significant is depreciation for your car’s make and model?
Generally, gap insurance is a smart buy if you have an auto loan to protect. And new car replacement is a good additional option if your car is brand new and rapidly depreciating in value. Purchasing both can give you complete peace of mind after an accident or theft.
Carefully evaluate your coverage needs and risks. Shop around to compare options and pricing from lenders, dealerships, and insurance companies. And don’t hesitate to ask a professional for advice.
Making an informed decision about gap insurance vs new car replacement will set you up for financial security as a car owner. Protect your asset and avoid owing money on a car you no longer have. With the right coverage choices, you can drive off worry-free.
Things to know about new car replacement insurance
If you are thinking about getting a new car or are already covered by this add-on, the following conditions still apply. If you don’t meet them, you might not be able to get the coverage.
- You have to have full coverage insurance. Getting a new car is an extra that you can choose to have, but you have to already have collision and comprehensive coverage in your policy. You can’t get coverage for a new car if you only have liability insurance.
- New car replacement insurance usually covers cars that are less than a year old and have less than 15,000 miles on them. If your car is totaled after this time, this feature will no longer cover you.
- Better car replacement vs. new car replacement: Some insurance companies offer better replacement insurance that gives you a car that is one year newer and has 15,000 fewer miles on it to make up for your loss. This is not the same as getting a new car, which pays you to buy the same brand and model of car that you used to have.
- You still have to pay a deductible. Even if the company pays out most of your claim, you still have to pay the deductible before they will settle your claim. To do this, you need to have saved enough money to cover the cost.
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Buying a new car is a significant investment of your financial resources. The last thing you want is to have to pay again if your car is totaled in the first year or so. New car replacement coverage is a type of insurance that can help drivers in this situation get a new car with little or no cost to them. Bankrate’s insurance team looked closely at what new car insurance is and how it might help you as a new car owner. Find out if it’s worth the money.
GAP Insurance | Buy from dealer or Insurance company?
FAQ
Is gap insurance the same as replacement insurance?
Is gap insurance worth it on a new car?
What does new car replacement mean in an insurance policy?
Is gap insurance Pointless?
Is GAP insurance better than new car replacement coverage?
Depending on the insurer, gap coverage might be available for more years than new car replacement coverage — beneficial if you have a loan. Get quotes to compare the costs of gap insurance and new car replacement coverage, especially if you owe more than the car is worth.
What is GAP insurance & how does it work?
Gap insurance coverage is designed to protect you if your car is a total loss by making up the difference between the auto loan balance and the car’s cash value. New car replacement coverage is different. It covers the difference between the car’s cash value and the cost of purchasing that exact car again new.
Does GAP insurance cover totaled or stolen cars?
Gap insurance isn’t the only type of coverage for totaled or stolen vehicles. If you cannot find gap insurance or it doesn’t seem to be the right coverage for you, check out loan or lease payoff coverage or new car replacement coverages.
Can I buy GAP insurance if I buy a new car?
For example, Nationwide auto insurance requires you to buy coverage within six months of a new car purchase. Erie Insurance lets you add its Auto Security to a policy at any time, as long as it’s before an accident. You may not be able to buy both new car replacement coverage and gap insurance.