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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Content Writer & Entrepreneur Shuman Roy

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: Jun 28, 2022

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Insurance match-ups: “New car replacement insurance vs. GAP insurance.”

First off, congratulations on the purchase of your new car. Now let’s make sure you have the right insurance to cover your brand-new vehicle.

You’ve likely heard that a brand-new vehicle loses value the second it’s driven it off the lot. Well, the reality is the car probably loses value the minute you sign the paperwork.

Either way, if you get into an accident shortly after you purchase the car, you could be subject to owing more money to the bank than the car is worth, assuming you took out a loan or a lease.

Here’s How it Can Go Wrong

You purchase a car with no or little money down for $25,000.

Within the first year, a car can lose as much as 20% of its value.

In other words, your $25,000 car might be worth as little as $20,000 within the first year.

If your car is totaled during that first year, you may still owe as much as say $23,000.

The bank that lent you the money to purchase the car is not going to “forgive” the difference between what you owe and what the car is worth, which is referred to as its actual cash value (figured as the replacement cost new, minus the depreciated value).

New Car Replacement Insurance vs. Gap Insurance

Insurers and lenders have designed two options for this relatively common occurrence. You can either purchase “new car replacement insurance” or “GAP insurance,” which is also referred to as “loan/lease” coverage.

Let’s look at the difference between the two:

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New Car Replacement Insurance

New car replacement insurance is the better (and more expensive) of the two options.

This option is typically only available for the first year of car ownership, as it wouldn’t make sense for an insurance company to replace your car after that time due to the rapid loss of value it will experience.

Car insurance for new car replacement may differ by company, but you can expect your coverage to include the following:

1. Your insurer will pay the verifiable brand-new vehicle purchase price of your damaged vehicle, not including any insurance or warranties purchased; or

2. The purchase price, as negotiated by the insurer, of a brand-new vehicle of the same or similar make, model and equipment, not including any furnishings, parts or equipment not installed by the manufacturer or manufacturer’s dealership; or

3. The market value of your damaged vehicle, not including any furnishings, parts or equipment not installed by the manufacturer or manufacturer’s dealership. So your aftermarket rims and stereo are not covered here.

New vehicle replacement coverage is provided without deduction for depreciation. That’s really the key here.

You don’t have to worry about losing money thanks to any value your car lost, i.e. you are not on the hook for the difference between what the car is worth and what you owe…you just get a new car.

So, new car replacement insurance will give your money for a brand new car of the same make and model (minus your deductible) instead of the depreciated value of your totaled car. With a new car replacement insurance policy you get the actual cash value, however you need to have comprehensive and collision coverage.

New car replacement coverage can be purchased as optional coverage to your auto insurance policy if you have collision or comprehensive insurance.

Moreover, your car must meet age and mileage requirements to qualify and you’ll have to pay a deductible. Your deductible will apply to new vehicle replacement insurance.

How much new vehicle replacement insurance costs will depend on the insurer, but it is an option offered by many different insurance companies. Nationwide new car replacement and Nationwide new car replacement plus are two examples of the types of plans that may be available to you.

So is new car replacement insurance worth it? If you have a brand-new vehicle, new car replacement insurance might be worth considering. New car replacement coverage can be an affordable option to keep the value of your car should you involve in an accident and total it.

GAP Insurance (Loan/Lease Coverage)

GAP insurance, on the other hand, is designed to pay only the difference between what your car is worth and what you owe. It doesn’t pay you to buy a new car, but it does provide the necessary money to pay off your vehicle loan.

You can forget about getting a new car. As your car gets a little older, this may be the only coverage available.

The older the car, the more the value depreciates. It wouldn’t make sense for the insurance company to go around and buy a new car for everyone who suffered a total loss on their car after it had lost half its value!

GAP insurance covers the difference between the actual cash value and the amount you owe on your vehicle.

GAP coverage may vary depending on which insurer or lender you purchase from, but you can expect to receive benefits similar to those outlined below.

You can expect to receive the difference between what you owe and what the car is worth minus the following, which aren’t covered:

1. Any overdue loan/lease payments at the time of loss.

2. The insurer/lender will not cover financial penalties imposed under a lease for excessive use, abnormal wear and tear or high mileage…NO FREEBIES!

3. Security deposits not refunded by a lessor. Basically, if you made a security deposit, you are not getting it back.

4. You will also not receive any money for the cost for extended warranties, Credit, Life Insurance, Health, Accident or Disability insurance purchased with the loan or lease. This means that any of the extra bells and whistles you were talked into buying when you were experiencing the euphoria of your new car purchase are not going to be reimbursed.

5. You shouldn’t expect to receive any compensation for carry-over balances from previous loans or leases. Previous poor financial decisions are not covered here.

Be smart with your new purchase. Obtain coverage that will ensure you do not end up owing money on a vehicle you no longer own.

Both new car replacement insurance and GAP coverage are relatively cheap…we are talking about $5 extra dollars per month or less.

So be sure to contact your insurance company or independent insurance agent today for details!