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Is Car Replacement Insurance Worth It in Canada?

By Arthur Dubois | Published on 01 Aug 2023

    If you just bought a new car in Canada, you might wonder if car replacement insurance is worth the investment. This comprehensive article covers everything from understanding car replacement insurance to exploring its pros and cons. We’ll also compare car replacement insurance with other insurance types and discuss real-life scenarios where it’s a valuable asset.

    Understanding Car Replacement Insurance

    Before diving deeper, let’s first understand what car replacement insurance entails. Put simply, car replacement insurance is a type of coverage that ensures you receive a new vehicle if your car is a total loss due to an accident or theft. Car replacement insurance provides a sense of security for car owners because they know they won’t suffer a significant financial loss if their vehicle is totalled or stolen. Instead of receiving a payout based on the depreciated value of your car, as with traditional insurance policies, car replacement insurance provides you with the funds to purchase a new vehicle of the same make and model.

    FeaturesCar replacement insurance
    Full replacement coverageYes
    Length of CoverageIt can be 1- 8 years
    Separate policyYes
    Where to buyDealerships and some insurers offer it
    Transferrable to a new carNo
    CostBased on the value of your carThe average cost can be $1261-$1917 for 5 years
    How to make a claimThrough your insurer and then through the company that sold the car replacement insurance policy

    What is Car Replacement Insurance?

    Like all insurances, car replacement insurance is designed to put you back into the same financial position you were in before your vehicle was totalled or stolen. It goes beyond the standard coverage offered by traditional insurance policies, offering a more comprehensive solution for car owners.

    Suppose you purchased a brand-new car, and you’re involved in a severe accident. Without car replacement insurance, you would receive a payout based on your car’s depreciated value or actual cash value. However, with car replacement insurance, you would be reimbursed for buying a new vehicle.

    Actual Cash Value vs. Replacement Cost

    Both actual cash value and replacement cost will cover replacing an item that’s damaged, destroyed, or stolen. The primary difference is the amount you will receive and how the insurer calculates the value.

    With actual cash value, the insurer will pay the amount of the item’s value before its’ loss. For example, if your five-year-old car is stolen, the company would find the value of the same or similar five-year-old model with similar features and pay you that amount. 

    Replacement cost covers the value of the item today. Using the same example, the insurer would find the same or similar make and model but the most recent version or a vehicle that is as close to what you had as possible. You would receive that amount as your payout.

    There are two significant differences between actual cash value and replacement cost. Actual cash value includes depreciation when calculating the value of your item, while replacement cost doesn’t. Second, actual cash value insurance is cheaper than replacement cost insurance. But replacement cost insurance can be worth it since it covers the depreciation of your vehicle.

    Type of InsuranceActual Cash ValueReplacement Cost
    Replacement car insuranceNoYes
    Replacement cost endorsementNoYes
    CollisionYesNo
    ComprehensiveYesNo
    Specified PerilsYesNo
    All PerilsYesNo

    How Does Car Replacement Insurance Work?

    When you opt for car replacement insurance, you buy a separate policy in addition to your regular car insurance. This additional cost ensures that you have the necessary coverage to replace your vehicle in the event of a total loss.

    Let’s say you’re involved in an accident that causes significant damage to your car, resulting in it being declared a total loss by your insurance company.  Instead of receiving the depreciated value of your vehicle, your insurance provider will reimburse you for the cost of purchasing a new car of the same make and model. Getting the total value of your vehicle allows you to get back on the road with a new car without worrying about the financial burden of replacing your totalled vehicle.

    Car replacement insurance typically has specific eligibility criteria and coverage limits. These criteria may include factors such as the age of your vehicle, the number of kilometres on the odometer, and the car’s condition before the accident. Coverage limits may vary depending on the insurance provider and your specific policy.

    Before purchasing car replacement insurance, it’s essential to review the terms and conditions of your policy to understand the specifics. Being familiar with your policy ensures you know what is and isn’t covered, allowing you to make an informed decision that suits your needs.

    The Cost of Car Replacement Insurance in Canada

    Now that we understand car replacement insurance let’s explore its cost in Canada. The cost of car replacement insurance varies depending on several factors, such as your location, car make and model, driving history, and insurance provider. 

    Factors Influencing the Cost of Car Replacement Insurance

    Several factors influence the cost of car replacement insurance. Generally, the more expensive your car is, the higher the premium you can expect to pay. The higher premium is because the cost of replacing a luxury or high-end sports car will be significantly higher than that of a more affordable vehicle.

    In addition to the value of your car, other factors such as your driving record, age, and location can also impact the cost of your car replacement insurance. If you have a history of accidents or traffic violations, insurance providers may consider you a higher risk and charge you a higher premium. Similarly, younger drivers are often charged more for car replacement insurance due to their lack of driving experience.

    Furthermore, your location can play a role in determining the cost of car replacement insurance. Insurance providers may increase your premium to account for the increased risk if you live in an area with a high car theft or accident rate.

    While car replacement insurance can provide valuable coverage, it may only be necessary for some. The insurance cost may outweigh the potential benefits if you have an older car with a low market value. It’s best to contact insurance providers to compare car insurance prices and get personalized quotes tailored to your specific circumstances.

    Average Cost of Car Replacement Insurance

    On average, car replacement insurance can cost between $50 and $300 per year in addition to your regular car insurance premiums. Remember that the cost of car replacement insurance is not a one-size-fits-all figure. Each insurance provider has its pricing structure; the final price will depend on your circumstances.

    Pros and Cons of Car Replacement Insurance

    As with any financial decision, weighing the pros and cons is essential. Let’s look at the benefits and downsides of car replacement insurance.

    Benefits of Car Replacement Insurance

    One of the main benefits of car replacement insurance is the peace of mind it provides. Knowing that you’ll be able to replace your totalled or stolen car with a new one can be incredibly reassuring, especially if you rely on your vehicle for daily transportation.

    Imagine you’ve been saving up for months to buy your dream car. Finally, you make the purchase and enjoy every moment behind the wheel. Unfortunately, your vehicle is stolen. Without car replacement insurance, you would be devastated by losing your car and the financial setback the loss causes. However, with this coverage, you’ll be able to get back on the road in a new car without any additional financial strain.

    Car replacement insurance eliminates the risk of a significant financial burden. Without car replacement insurance, your insurance policy may only cover the vehicle’s cash value. The actual cash value could be significantly less than the cost of replacing your car because the actual cash value includes depreciation in its calculations. 

    With car replacement insurance, you won’t have to dip into your savings to purchase a new car or settle for a used vehicle of lesser value. Instead, you’ll receive the funds to buy a new car, just as you had before the incident.

    Downsides of Car Replacement Insurance

    While car replacement insurance offers undeniable benefits, it’s also important to consider its downsides. The premium for car replacement insurance can increase your overall insurance expenses. However, the extra cost may be worth it for some.

    Evaluating your budget and financial situation before deciding whether car replacement insurance is right for you is essential. Consider factors such as the value of your vehicle, your driving habits, and the likelihood of accidents or theft in your area. By carefully assessing these factors, you can determine if the added expense of car replacement insurance aligns with your financial goals and priorities.

    Another factor to consider is that car replacement insurance may only be available for some vehicles or in some regions. You must check with your insurance provider to determine if your car is eligible for this coverage and is offered in your area.

    Remember that insurance policies can vary, so it’s essential to review the terms and conditions of car replacement insurance carefully. Familiarize yourself with the coverage limits, deductibles, and any applicable exclusions. By understanding the details of your policy, you can make an informed decision about whether car replacement insurance is the right choice for you.

    Comparing Car Replacement Insurance with Other Insurance Types

    Let’s compare car replacement insurance with other commonly available insurance types.

    Car Replacement Insurance vs. Collision Insurance

    Collision insurance primarily covers damage to your vehicle resulting from an accident, regardless of who is at fault. While collision insurance ensures your car is repaired or replaced, car replacement insurance provides you with a new vehicle if your car is declared a total loss. Therefore, car replacement insurance offers higher coverage and greater peace of mind.

    Car Replacement Insurance vs. Comprehensive Insurance

    Comprehensive insurance covers damage to your car resulting from non-collision incidents, such as theft, vandalism, fire, or natural disasters. While comprehensive insurance provides coverage for a wide range of incidents, it typically still pays out based on the depreciated value of your car. Car replacement insurance, on the other hand, ensures you receive a vehicle similar to your totalled or stolen car, minimizing any potential financial loss.

    FAQs About Car Replacement Insurance in Canada

    What is car replacement insurance?

    Car replacement insurance is a separate policy car dealerships offer when purchasing a new vehicle. It insures your vehicle for the replacement cost if your car is totalled or stolen and not recovered. 

    How does replacement car insurance work?

    Depending on the policy, you can insure your vehicle for 1-8 years. If you need to make a claim, submit it to your insurer and then to the car replacement insurer. 

    Is car replacement insurance worth it?

    If you have a new vehicle, car replacement insurance can be a benefit. The policy doesn’t factor in depreciation which can be as high as 20% in the first year. If you had to replace your vehicle without car replacement insurance, you’d have to cover the depreciation cost.

    How much is new car replacement insurance?

    Policies average between $1261-$1917 for five years, or $$252.20-$383.40 annually.

    Who offers new car replacement insurance in Canada?

    You can purchase new car replacement insurance at the dealership where you bought your car. Some brokers also offer new car replacement insurance.

    Compare Car Insurance Policies in Canada
    Compare Car Insurance Policies in Canada
    Compare Canadian car insurance policies and find the one that best suits your needs.

    Arthur Dubois is a personal finance writer at Hardbacon. Since relocating to Canada, he has successfully built his credit score from scratch and begun investing in the stock market. In addition to his work at Hardbacon, Arthur has contributed to Metro newspaper and several other publications