Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Jul 19, 2021

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new car

Whether you’re a recently licensed driver buying your first car or simply purchasing a new car to replace “old reliable,” you will need to factor in the costs and options of how to insure your recent addition to the family.

There are many things to consider to be certain you are properly covered while ensuring you aren’t paying too much.

You will need to verify the liability coverage you need, whether or not you need/want physical damage coverage, how and when to notify your insurance company of the new car purchase, and if new car replacement or gap insurance coverage is a good idea for you.

Basics of Car Insurance

It’s important to be up to speed on the following information whether this is your first or 20th car.

The rules and concepts below are relevant regardless of how much you already know about car insurance.

And it’s best to start with the basics and drill down to the finer details of obtaining the right coverage so you’re not overwhelmed.

Liability Car Insurance

Your state will have mandatory minimum liability limits. This is the lowest amount of bodily injury and property damage coverage you must purchase to stay “legal.”

Is minimum car insurance the right option for you? Make sure to read the “ins and outs” about how much car insurance you need before making that decision.

Basically, in order to protect the public’s safety and your finances, liability insurance is designed to pay for damages you cause to others as a result of any negligence on your part while operating your car on U.S. roadways.

Uninsured motorist and Underinsured motorist liability insurance are designed to protect you against bodily injury you suffer as a result of another driver’s negligence, when that driver is not insured or does not have high enough liability limits to pay for your injuries.

Physical Damage Coverage

This coverage type is designed to reimburse you for damage caused to your own vehicle. You may purchase collision coverage or comprehensive coverage (also known as “other than collision) for your vehicle as well.

If you damage your own car in an accident, or the vehicle is damaged by something else all together, hail for example, physical damage coverage is designed to repair or replace your car, minus the deductible of course.

Note: If you car is damaged as a result of another driver’s negligence, i.e. someone else runs into you on the freeway, their liability insurance should cover the claim…assuming the other driver has an insurance policy and high enough limits to pay for all of the damage they caused.

Uninsured and Underinsured motorist property damage coverage are designed to protect you against this type of loss.

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Physical Damage Required on Loans/Leases

Physical damage coverage is not required by law in any state. However, we are typically required to purchase this coverage when we borrow money to buy/lease our cars…as it protects the lender’s interest in your vehicle.

Of course, the bank will still want their money in the event you total your new vehicle. Without being listed as a loss payee on your policy, the odds of us repaying our loans on a vehicle sitting in a junk yard are minimal.

When to Forego Physical Damage Coverage?

You may choose to forego physical damage coverage on a vehicle you own outright. The decision to take a pass on physical damage coverage depends on the value of your new car.

It would not make sense to pay a premium for physical damage coverage on a vehicle that isn’t worth much money. If your vehicle was totaled, you wouldn’t get much for it anyway…so why spend the additional money to cover it. Remember, the insurance company typically pays you the car’s actual cash value in the event of a claim.

How Do I Obtain Insurance Coverage for a Car I Don’t Yet Own?

The good news is that the insurance company has already thought this through.

There is a “grace period” on almost every auto insurance policy that allows us to go out and buy a new car or replace one that we already have.

It might vary by car insurance company, but a common grace period is 30 days to add your new car to your existing policy.

This, of course, only works if you have an existing policy. Even if you do have a policy in-force, it doesn’t hurt to call the insurance company from the car dealership to ensure you are actually covered.

One phone call can get you straightened out in no time and you can have the dealer fax over all the important paperwork.

You will automatically be covered if you are currently listed as a driver on someone else’s policy, (your parent’s policy for example).

However, you will need to notify the insurance company of the new car purchase.

Many young people have their vehicle added to their parent’s insurance policy for a short time before they purchase their own coverage, and then simply remove themselves and the vehicle off that policy when new car insurance coverage is in place.

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Car Insurance for New Drivers

If you haven’t already done so, you will need to purchase insurance for your new car.

Many states require you to have an insurance policy in order to register a vehicle.

It is recommended that you speak with an independent agent and/or an insurance company prior to sitting down to sign paperwork at the dealership. This will likely save you money, as you will have the opportunity to shop your rate.

The dealership where you buy your car should be able to recommend an insurance agent to you in the event your new car was an impulse purchase.

Insurance agents can bind coverage for you over the phone while you are sitting at the dealership (assuming you can make the down payment over the phone with them).

I Already Have Car Insurance and Am Replacing or Adding an Additional Vehicle

As discussed above, your new car purchase will fall under the grace period in your current policy. However, you will want to verify how soon you need to inform you insurer of an additional vehicle or a replacement vehicle.

You typically have less time to notify your insurer when adding an additional vehicle to your policy; meaning, you have two cars and now will own three. Of course, they will want to start collecting the additional premium as soon as possible.

Your policy’s grace period for notification of a replacement vehicle may be slightly longer than that for an additional vehicle. Either way, it’s best to inform the insurance company as soon as you can.

Note: When adding a new vehicle to a policy, the highest deductibles currently listed on your policy are assigned to your new purchase until you tell the insurer otherwise.

For example, if you have an older car with a $500 collision deductible and a newer vehicle with a $1,000 deductible, the $1,000 deductible applies to the new vehicle whether it is an expensive vehicle or not.

What If I’m Buying a Brand New Car?

You will want to consider purchasing either new car replacement or gap insurance coverage in the event you purchase a brand new car.

Both coverage types are designed to reimburse you properly in the event your new car, which depreciates in value rapidly when you drive it off the lot, is damaged and you owe more money on the vehicle than its actual cash value at the time of the loss.

As the name implies, new car replacement coverage is designed to physically replace your new car in the event it’s totaled, whereas gap coverage is designed only to make sure you do not end up owing your bank money for a new car that has been sent to the scrap yard.

Check with your insurance company to determine if they offer new car replacement coverage. If they do, that may be your best option. If not, try to obtain gap (loan/lease) coverage from your insurer or the lender (gap insurance on a car lease).

They will both likely offer the coverage at a very reasonable premium. Make sure to get the coverage details from both and compare them before you simply look to see who is selling the coverage for less money.

Remember, if you bother to purchase this coverage, you had better make sure there are no potential pitfalls when it comes to insurance claims time.

Make this decision and inform your insurance company that you would like to add this coverage before driving off the lot with your new car.

If you do not add this coverage before leaving the lot, and suffer a total loss, you may end up paying the difference to the bank.

In closing, always be sure to gather plenty of insurance quotes to ensure you get the best price and coverage for your new car!