Why New Car Replacement Coverage Could Really Pay Off

New car replacement coverage could save you a ton of money if something goes wrong.

When motorists get into a car accident, their auto insurance should help them cover their losses. But the specific amount of support a motorist gets from his or her insurer will depend on the kind of coverage they have.

For drivers who have a newer vehicle, it may be a smart idea to pay extra for a specific type of protection called new car replacement coverage. Here's why.

Could new car replacement coverage be important?

New car replacement coverage may be worth paying for in situations where drivers have a newer vehicle -- one that's not more than a few model years old.

New cars lose their value very quickly as soon as their new owner drives them away from the car lot. And when a newer vehicle is destroyed in an auto accident and is declared a total loss, insurance companies generally pay only what the market value of the vehicle is.

For a motorist who has a newer car, the market value of the vehicle may be well below what it would cost that driver to actually replace that vehicle by going to the dealer and buying a comparable car. As a result, if a driver faces a covered loss, the insurer will pay out -- but not enough to put them back in the same position they were in before the accident.

When a motorist gets a reduced payout based on the depreciated value of their new car, they'll have a choice between buying an older used model vehicle or coming up with a lot of money out of pocket to buy a nice new car again.

But if that driver has new car replacement coverage, they won't have to make that difficult decision. The insurer will pay enough for the policyholder to buy a brand new car of the same make and model as the vehicle that was destroyed as a result of the covered event.

New car replacement is an add-on coverage option, available only to policyholders who have collision and comprehensive car insurance coverage. Collision coverage is the insurance that protects drivers who are at fault in a crash or who get into a single-vehicle accident. Comprehensive coverage protects against other losses that happen to a car, such as theft or if a tree fails on it or an animal hits it.

It's also available only if a policyholder has a newer vehicle. While the rules vary slightly by insurers, typically the driver's current car must be between three and five model years old or newer in order for a policyholder to be eligible for this protection. And not every insurer offers it.

If new car replacement coverage is important because of a strong desire not to get stuck with an older, cheaper vehicle if a new vehicle is destroyed, it's important to shop around carefully when buying insurance protection. Drivers should make sure their insurance company offers this kind of protection and that the price for it is affordable when combined with other premiums.

By shopping around with multiple car insurance companies, motorists can get the protection they need for a new car while still keeping insurance costs as reasonable as possible.