Gap Insurance vs New Car Replacement: What’s the Difference?

If you recently purchased a new car, you may be wondering whether you should get gap insurance or new car replacement coverage. Both offer protections in the event your new vehicle is totaled, but they work in different ways.

In this comprehensive guide, we will cover:

• What is gap insurance and what does it cover?
• What is new car replacement insurance and what does it cover?
• Key differences between gap and new car replacement
• When each type of coverage is recommended
• Pros and cons of gap insurance vs new car replacement
• Whether you can or should get both gap and new car replacement
• Examples of how each coverage works in the event of a total loss

By understanding how these two popular auto insurance add-ons work, you can determine which option (or combination) provides the level of protection you want.

What is Gap Insurance?

Gap insurance covers the “gap” between what your car insurance will pay if your vehicle is totaled and what you still owe on your auto loan or lease.

For example, let’s say you purchase a new $30,000 car with a $3,000 down payment and finance the remaining $27,000. A few months later your car is totaled in an accident.

The car has depreciated and your insurer determines its actual cash value is now only $22,000. They pay out that amount, leaving you with a $5,000 balance still owed to the lender. This is the “gap” that gap insurance covers.

Gap insurance is technically a waiver and not a full insurance policy. It waives your liability for the loan/lease gap amount in the event of a total loss.

What is New Car Replacement Insurance?

New car replacement insurance pays the cost to replace your new car with the same make/model if it’s totaled within the first 1-2 years of ownership.

For example, let’s say you buy a new $30,000 car and add new car replacement coverage to your policy. Six months later it’s totaled. The insurer pays out $30,000 for you to replace the car with a brand new model of the same type.

Unlike gap coverage, this reimburses you for the entire cost of a new car, not just the depreciated value or loan balance. To qualify, insurers often set limits on the car’s age and mileage.

Key Differences Between Gap and New Car Replacement

Here are some of the main differences between gap insurance and new car replacement coverage:

• What it pays for: Gap covers remaining loan/lease balance; new car replacement covers cost of a new car

• Amount paid: Gap pays loan/lease gap amount; new car replacement pays full cost of new car

• Requirements: Gap required by lender/lessor; new car replacement is optional

• Car limits: Gap applies to any car; new car replacement has age/mileage requirements

• Applies to leased cars: Gap yes; new car replacement no

• Refundable: Gap no; new car replacement yes (pro-rated if canceled)

• Customizable limits: Gap coverage is fixed; new car replacement limits can vary

Essentially gap insurance is focused on ensuring your loan or lease is covered, while new car replacement ensures you can get back into the same new car if it’s totaled shortly after purchase.

When is Each Type of Coverage Recommended?

Gap insurance is recommended for leased vehicles or when you make a low down payment on a financed car. The smaller your down payment, the wider the potential “gap” if the car is totaled and depreciated in value.

Many lenders and lessors require gap coverage to approve auto financing or leases.

New car replacement insurance is recommended when you purchase a new (not used) vehicle and want to ensure you can replace it with the same new model if it’s totaled shortly after. This coverage provides more protection from depreciation.

To qualify for new car replacement from most insurers, your car cannot be more than 1-2 years old and must have fewer than 15,000-25,000 miles. Gap insurance has no such age or mileage limits.

Pros and Cons of Gap Insurance vs New Car Replacement

Gap Insurance Pros

• Covers the remaining loan balance if car is totaled
• Much cheaper than new car replacement coverage
• May be required by your lender/lessor

Gap Insurance Cons

• Does not pay for a new car
• Not refundable if you cancel early or pay loan off early
• Limited flexibility in coverage limits

New Car Replacement Pros

• Pays the full cost of a new car if yours is totaled
• Protects against depreciation
• Customizable age and mileage limits

New Car Replacement Cons

• More expensive than gap insurance
• Car cannot be leased or have previous owners
• Car must meet age and mileage requirements

Can You Get Both Gap Insurance and New Car Replacement?

Some insurance companies allow you to purchase both add-ons, while others prohibit combining gap and new car replacement on the same policy.

Gap insurance is focused on the remaining loan balance, while new car replacement ensures you can get a new car. So there are benefits to having both, if allowed by your insurer.

For example, gap would pay the leftover loan amount and new car replacement funds could be used towards the price of a brand new replacement vehicle. This comprehensive protection comes at a higher cost, however.

Before purchasing both, weigh the added expense against the value of the extra coverage. Also confirm your insurer allows bundling gap and new car replacement.

Examples of Gap and New Car Replacement Claims

Here are some examples to illustrate how gap insurance and new car replacement coverage work if your new car is totaled after depreciating in value:

Example 1

• New car purchase price: $25,000
• Car loan amount: $23,000
• Gap insurance: Yes
• New car replacement: No
• Car value at time of total loss: $18,000
• Payoff amount still owed: $21,000
• Gap insurance pays: $3,000 (the gap between car value and remaining loan balance)
• You pay: $18,000 for a replacement used car

Example 2

• New car purchase price: $25,000
• Car loan amount: $23,000
• Gap insurance: No
• New car replacement: Yes
• Car value at time of total loss: $18,000
• Payoff amount still owed: $21,000
• New car replacement pays: $25,000 for a new identical car
• You pay: $0 but still owe $21,000 to lender

Example 3

• New car purchase price: $25,000
• Car loan amount: $23,000
• Gap insurance: Yes
• New car replacement: Yes
• Car value at time of total loss: $18,000
• Payoff amount still owed: $21,000
• Gap insurance pays: $3,000 (the gap amount)
• New car replacement pays: $25,000 for a new identical car
• You pay: $0 and owe $0 to lender

Get the Right Coverage for Your Situation

As you can see, gap insurance and new car replacement provide overlapping but differentiated protections. Evaluate your priorities, loan/lease status, car value, and insurer options to select the best approach. Or consider bundling both add-ons for comprehensive coverage.

Gap insurance brings peace of mind by ensuring your auto loan balance will be covered if your car is totaled shortly after purchase.

New car replacement hedges against depreciation in those early years by providing funds to replace your new car with the same model.

Understanding the nuances helps ensure you get the right protection for your situation. Drive safely and make sure you have adequate insurance and optional add-ons to avoid any unpleasant surprises.