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How Does Replacement Car Insurance Work?

How Does Replacement Car Insurance Work?

Your vehicle is often more than just a means of transportation — it’s a source of freedom and a getaway to unforgettable journeys. But what if fate deals an unexpected blow and totals your brand-new car? That’s where insurance for car replacement steps in to help you deal with the financial aftermath. In this article, we’ll explore the coverage options available to help you pay off your car loan or lease and get a replacement vehicle.

Regular Insurance Coverage in an Accident

Many believe regular insurance is enough for new vehicles, assuming they’ll be fully covered in case of an accident. However, standard auto insurance only reimburses the current value of your vehicle. As cars depreciate rapidly, often 10% to 20% right off the lot, the insurance payout may fall short of what you paid, leaving you in a bind if you’re leasing or financing the vehicle.

What is Replacement Car Insurance? 

The first few years of owning a vehicle are the most critical for replacement coverage, also known as gap insurance. You can consider two gap insurance options: Replacement cost coverage and depreciation waiver coverage.

Replacement Cost Coverage

This coverage is purchased when you buy a new vehicle. If you’re in an accident that requires a car replacement, this option will allow you to buy a brand-new vehicle, regardless of the price.

  • Example: If you purchase a car in 2023 for $30,000 and it’s totalled in 2025, replacement cost insurance will provide funds for the same model, even if its value has increased to $40,000.

It’s important to note that this coverage is usually available for a limited period, often up to five years, and the cost of it will increase in later years.

Depreciation Waiver Coverage

Depreciation waiver car insurance is another option for new vehicle purchases. If you total your car, the waiver of depreciation will pay the difference between the original manufacturer’s suggested retail price (MSRP) that you bought the vehicle and its current depreciated value.

  • Example: If you purchased a new car in 2023 for $30,000 and had an accident in 2025, your regular insurance would typically pay the depreciated value of, say, $24,000. The depreciation waiver covers the $6,000 difference.

This coverage is beneficial, especially if you have a loan or lease, because regular insurance won’t offer enough to repay your debt. Keep in mind that, like replacement cost, depreciation waiver is only available for a limited period, typically five years.

Is Gap Insurance Worth it?

When the highly-anticipated moment of finally deciding on the perfect vehicle strikes, a question might linger: Is vehicle replacement insurance worth it?

As mentioned above, gap insurance is the most critical in those early years of new car ownership. If you have a car loan or lease and get into an accident only a few years later, you will need more than regular insurance coverage to pay the amount you owe. Ensure you take into consideration that replacement car insurance:

  • Protects against depreciation
  • Offers peace of mind
  • Comes with affordable premiums

Coverage When You Need It Most

To make an informed decision and secure the best gap insurance coverage for your needs, contact us at Rowat Insurance. We can help you navigate the intricacies of car insurance policies and ensure you find optimal protection for your brand-new investment.

Rowat Insurance

Insuring Ontario and Quebec since 1955. Trust Rowat Insurance Brokers to look after your home, auto, business and life insurance needs. We always guarantee fast, friendly service and highly competitive premiums. As brokers, we are entirely independent from Insurers and Financial Institutions; we will work with you to analyze and advise on risk, and customize the coverage that is right for you.