Replacement car insurance is an optional insurance endorsement that pays to replace your new vehicle with a similar new model or reimburses its original purchase price if it’s declared a total loss due to theft or an accident. Unlike standard auto insurance, it protects you from depreciation, making it especially valuable for new, financed, or leased vehicles. Let’s take a look at some situations where replacement car insurance may make sense for you.
What Is Replacement Car Insurance?
Vehicle replacement insurance is an optional add-on to your car insurance policy. This policy helps protect the full value of your new (or nearly new) vehicle. This policy will ensure that if your car is written off due to a total loss, such as a collision or theft, you will be covered. This will assist you with either a brand-new vehicle of the same make and model or a payout equivalent to its original purchase price.
This is quite different from your average car insurance policy. In most cases, those will typically only pay out the current actual cash value, or ACV, of your vehicle at the time the claim occurs. Since new vehicles begin depreciating the moment you get behind the wheel, the difference can be quite significant. In some cases, people may save thousands of dollars within the first year alone.
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What Types Of Replacement Coverage Are in Canada?
In Canada, there are multiple types of Replacement Car Insurance add-ons. Let’s take a look at the most popular types. It’s important to keep in mind that depending on your province or provider, specific terms may differ!
- Gap Insurance: While not technically the same, Gap insurance is quite similar to Replacement Coverage and is often grouped into the same conversation. Gap insurance will cover the difference between your car’s value and the remaining balance that is on your car loan or lease in the event of a total loss.
- Replacement Cost Coverage: Replacement cost coverage, also known as OPCF 43 in Ontario, is an endorsement that ensures that in the event a total loss occurs, your payout will cover the cost of a new equivalent vehicle without accounting for any depreciation. As of now, this is only available in Ontario.
- Limited Waiver of Depreciation: This is often offered by dealers or insurers and will protect you from depreciation. In most cases, this only lasts for a limited time, roughly 24-60 months after the purchase of your vehicle.
Reminder: OPCF 43 is only unique to Ontario and it’s not applicable to other provinces.
Gap Insurance Vs. Replacement Insurance
Feature | Gap Insurance | Replacement Car Insurance |
Primary Purpose | Pays the remaining loan or lease balance if your insurance payout isn't enough after a total loss. | Replaces your vehicle with a new one or pays the original purchase price after a total loss. |
Who It's Best For | Drivers who finance or lease a vehicle. | Drivers who have a new vehicle and want to avoid depreciation |
What It Covers | The difference between your insurance payout and what you are left owing. | The full replacement value of your vehicle without depreciation. |
Coverage Duration | Usually lasts for the length of your loan or lease. | Usually lasts 2-5 years, depending on your insurer. |
Limitations | Doesn't increase your insurance payout, only covers the loan or lease shortfall. | Only available for eligible new vehicles and expires when your endorsement ends. |
Do I Need Replacement Coverage?
Like any add-on when it comes to insurance, whether you need replacement car insurance will depend on several factors. Your vehicle, how you purchased it, and your personal risk tolerance all play a role in determining whether this coverage is right for you.
It’s important to note that if your vehicle is older, fully paid off, or simply has a relatively stable market value, the added cost of replacement car insurance may not offer you many benefits.
You should consider purchasing replacement car insurance if any of the following situations apply to you:
- You bought a new or nearly new car: If your car is less than three years old, your depreciation can decrease its value in the event of a total loss occurring. Replacement insurance will help you in events such as this, making sure you’re not left covering the gap yourself.
- You financed or leased a car: If you still find yourself making payments, a write-off with no replacement coverage could leave you paying out-of-pocket for a vehicle that you can no longer drive.
- Your car model holds less resale value: Unfortunately, some cars will depreciate faster than others. If you’re concerned about rapid loss in value when it comes to your car, this coverage will give you some peace of mind.
What Is Covered By Replacement Car Insurance?
Coverage varies depending on your insurer and the province where you live. However, you can expect most vehicle replacement policies in Canada to cover the following:
- Total loss from collision, fire or theft
- Taxes, licensing fees and in some cases, dealer fees
- Replacement with a similar or identical model.
On the other hand, vehicle replacement insurance typically does not cover:
- Partial losses, such as minor damage or cosmetic issues
- Upgrades or aftermarket modifications made to your car
- Wear and tear or mechanical failures
How Much Does This Insurance Cost?
When it comes to add-ons, replacement car insurance will be a bit on the pricier side. You can expect it to add a few hundred dollars per year to your premiums. In some cases, insurers offer it as part of a bundled package. In other cases, they may treat it as a standalone endorsement. Sometimes, dealerships may offer similar coverage, but it is usually a bit pricier than if you were to get it from your insurer. As always, it’s worth comparing your quotes and coverage options before you sign anything. This is especially the case if you are buying your vehicle through a dealership that includes add-ons by default.
Replacement Car Insurance: Frequently Asked Questions
Is replacement car insurance worth it?
Replacement car insurance is worth considering if you own a new, financed or leased vehicle because it protects you from depreciation after a total loss.
How long does replacement car insurance last?
Most policies last between two and five years, though the insurer and type of endorsement may differ.
Will replacement car insurance cover mechanical problems?
No. Replacement car insurance only covers your vehicle if an accident, theft, or another covered event results in a total loss. It does not cover wear and tear or mechanical failures.
Is replacement car insurance the same as gap insurance?
No. Gap insurance will pay the difference between your loan balance. Replacement insurance will pay for a comparable new vehicle or your vehicle’s original purchase price.
Is Replacement Car Insurance Worth It For You?
Replacement car insurance isn’t necessary for every driver. However, it can provide valuable financial protection if you own a new, financed, or leased vehicle. Before adding it to your policy, compare your coverage options. This way, you can make sure you’re getting the protection that best fits your needs. Remember, if you are ever in the market for a new insurance policy, don’t hesitate to reach out to us at isure today!
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