How Does Replacement Car Insurance Work in Canada?
As you likely know, there are several different types of car insurance plans for Canadians to choose from. Each of these plans offers different levels of coverage at various price points.
Although having numerous options is beneficial, it makes it challenging to find the perfect plan for you.
If you're currently looking for auto coverage for your new vehicle, you may want to consider getting replacement car insurance as well. To learn more about car replacement insurance and how it benefits Canadian drivers, be sure to continue reading.
How does replacement car insurance work in Canada?
As the name implies, replacement cost coverage auto insurance (also known as gap insurance) is a type of policy that covers the cost of your vehicle after a collision or accident.
How exactly is this different from the regular auto insurance that you're required to have? We're glad you asked!
Traditional auto insurance vs. replacement insurance - what's the difference?
Standard auto insurance covers the cost of vehicle damage after a collision, but the amount you receive is influenced by depreciation.
This means that drivers receive, what we call in the insurance industry, actual cash value. Actual cash value is a term that describes the market value of an item, in this case, your vehicle.
For some drivers, having just traditional auto insurance isn't enough; in the event of an accident, you may find yourself "upside-down". This is another popular insurance term, which refers to when an individual owes more on the vehicle than its market value.
For instance, let's imagine that you paid $30,000 for a brand new vehicle two years ago. Since the initial purchase, the car has lost about 20% of its value ($6,000). If you get into an accident and only have standard auto insurance, you'll receive the vehicle's current market value ($24,000).
If you owe money on the vehicle, you're still responsible for the remaining payments. This leaves drivers without a car and a hole in their pocket.
On the other hand, if you have replacement car coverage auto insurance, you'll be compensated for the vehicle's entire value.
In the event of a collision or accident, you'll still be required to pay off the remainder of your loan, but if you've received the full value of your vehicle, it will be less of a financial burden. Check also this article about car insurance and windshield replacement.
FAQs about replacement auto insurance
These are some of the questions we hear the most about replacement auto insurance:
Who offers replacement auto car insurance?
Generally, you can purchase replacement auto insurance from the car dealership where you bought your vehicle.
However, some auto insurance providers offer replacement auto insurance as well. Double-check with your auto insurance provider to see if they offer replacement auto insurance.
How much does replacement auto insurance cost in Canada?
The price depends on the cost of your vehicle. Canadian drivers add a flat rate (based on the price of the car) to their lease or payment plan.
How long does replacement auto insurance cover you for?
Canadian drivers can choose the length of their coverage. Most providers and dealerships offer a minimum of one year and a maximum of eight years of coverage.
Can you transfer your replacement auto insurance to another vehicle?
Unfortunately, you can't transfer your replacement auto insurance to another vehicle. This type of policy is meant to cover a single vehicle.
How do you make a claim?
The process is very similar to making a traditional auto insurance claim.
After a collision or accident has taken place, you should contact your auto insurance provider. Your insurance company will provide you with the initial coverage.
Afterwards, you need to reach out to the dealership where you purchased or leased your vehicle. The dealership will then supply you with the remainder of your compensation.
Who should consider getting replacement car insurance in Canada?
As you now know, replacement auto insurance is highly beneficial for several types of Canadian drivers. Are you one of the following drivers?
Drivers with multi-year loans
If you have a lengthy loan on your vehicle, then you should consider replacement car insurance.
The longer that you own a vehicle, the more prone it is to depreciation. On a similar note, if you have a lengthy car loan, one can assume that you'll be driving your vehicle for several years. With all this in mind, you can see why replacement car insurance is a wise choice.
Luxury vehicle drivers
Have you ever heard the rumour that vehicles lose 50% of their value once driven out of the parking lot?
Well, this is a bit of an exaggeration, but there's some truth to this.
On average, a vehicle loses about 30% of its value in the first year. This may sound manageable; however, it's just the tip of the "depreciation iceberg". Some high-end luxury vehicles lose upwards of 70% of their face value after just five years.
For instance, if you paid $100,000 for a luxury vehicle five years ago, it'd be valued at less than $30,000 today. Due to this steep decline, it's clear that it's imperative for luxury vehicle owners to purchase replacement car insurance. Getting into an accident could potentially cost you tens of thousands of dollars.
Drivers that made a small down payment
If you made a substantial down payment on your new vehicle, then you may not need to worry about replacement car insurance.
Making a down payment of 25% or more gives you a serious amount of equity in the car. Because of this, the remainder of your loan and the current market value of your vehicle should be relatively similar. This leaves very little room for you to be left "upside-down".
However, if you made a down payment of less than 25%, you may want to think twice about replacement car insurance. By making a smaller down payment, you have less equity in the vehicle. In turn, you're at a greater risk of being left "upside-down" and forced to deal with the remainder of your car payments.
Get traditional and replacement auto insurance for the best coverage
So, is new car replacement insurance worth it in the end? We feel like it depends on the driver and their personal preferences.
If you made a small down payment on your vehicle or own an expensive luxury model, you should consider purchasing replacement car insurance today. It may end up saving you in the long run.