Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health insuran...

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Chris Harrigan has an economic degree from Limestone College and an MBA from Clemson University. He previously managed auto insurance claims for Enterprise Rent-A-Car. Currently, he is using his business and insurance expertise to provide insurance data analysis and visualizations to enhance the user experience.

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Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager Chris Harrigan

UPDATED: Sep 20, 2020

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Key takeaways...

  • Standard insurance policies will pay you up to your car’s fair market value when paying for damage losses
  • Fair market value is the assumed value of an item after deducting a depreciation charge
  • You can add a special provision to some policies so that you don’t have to pay out-of-pocket for a new car
  • The cost of a New Car Replacement endorsement can be minimal but your car must meet certain age requirements
  • Consider how much you’ll have to pay out to replace your vehicle with a like model before adding the endorsement

When you buy a new car, you do everything in your power to keep that vehicle in mint condition for as long as you possibly can. Frequent washes and routine wax jobs will definitely help keep the paint from fading, but that doesn’t mean your car will look new forever.

Even if it does look just like it’s off the dealer lot, it doesn’t mean your car will be valued as if it’s never had an owner.

All cars depreciate when they are purchased. In fact, the average car will depreciate by almost 10 percent of its MSRP as soon as you sign the paperwork and drive your new car home.

As the months and years go by, values depreciate even more. You might not mind this if you love driving your vehicle, but it does matter if the vehicle is ever totaled.

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How much has your car’s value depreciated?


Some car consumers refuse to buy their vehicles new because of how quickly they depreciate.

If you’ve already bought a new model or you’re shopping for one over a holiday weekend where there are sales that are tough to pass up, it’s good to have realistic expectations on what your car is going to be worth in the next few years.

Some cars retain their value better than others. These are usually exotic cars and antique vehicles that are highly sought after.

Most other vehicles depreciate at the same rate. There are depreciation schedules that will help you project what your car, assuming it’s well maintained, will be worth in the years down the line. Here is a year-by-year depreciation schedule:

  • One minute after purchase vehicle is worth 91 percent of its True Market Value
  • One year after purchase vehicle is worth 81 percent of its True Market Value
  • Two years after purchase vehicle is worth 69 percent of its True Market Value
  • Three years after purchase vehicle is worth 58 percent of its True Market Value
  • Four years after purchase vehicle is worth 49 percent of its True Market Value
  • Five years after purchase vehicle is worth 40 percent of its True Market Value

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Why is depreciation so important?

If you don’t plan on selling your car, you might think that car depreciation schedules and charts are irrelevant.

It’s not fun to think that the market estimates that your car is worth less than 50 percent of its True Market Value just four years after purchase but it doesn’t necessarily impact you unless you’re trading your car in or selling it on the private market.

You don’t plan for a major accident but you should always consider the fact that you could have one. You may not be planning to sell your well-maintained vehicle anytime soon, but that doesn’t mean that depreciation can’t still affect you.

If you get into an accident, you’re going to be dinged for depreciation just like you would if you were trading the car in because of how auto insurance valuations work.

How is a vehicle’s insurance value determined?


If your car is totaled, the insurance company has to determine what the car is worth before sending you a check.

It’s your insurer’s job to give you a fair offer but the adjuster isn’t obligated to pay you more than the car is worth in the private market.

Your claims adjuster asks you about your vehicle’s condition and features when determining its value.

Since carriers are only contractually obligated to pay you up to your car’s Actual Cash Value based on what the market says, you could be forced to pay money out of your pocket to replace the vehicle when it’s damaged beyond repair.

This valuation can be especially frustrating when you’ve taken such good care of your car just to have to shop for a new one on a limited budget. There’s no real guarantee that your claims check will pay for a new car in its entirety.

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What is New Car Replacement coverage?

Just because the standard contract says that you’ll receive a maximum amount of money when your car is totaled doesn’t mean that there isn’t a solution. One way to avoid having a huge gap in coverage is to consider purchasing a New Car Replacement endorsement.

A New Car Replacement endorsement is a coverage add-on that many auto insurance carriers offer to their customers for an added premium.

The coverage will ensure that you’ll receive a claims payment for a new car instead of just the depreciated value of your car. Since the depreciated value of a car that’s three years old or newer won’t pay for a new car, having this endorsement can be helpful.

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What is Better Car Replacement coverage?


Some carriers have created even better endorsements that will help you get a better car than you already had. This is an attempt to attract more customers who own newer cars and want more protection.

With Better Car Replacement, you’ll get a check for a car that’s a model year newer with 15,000 fewer miles.

You will have to check with your insurer to see if you’re going to be able to add this endorsement to your insurance. First off, you’ll have to carry full coverage on the car before this will even become an issue.

If you do have a full coverage plan in place, here are some things to consider:

  • The vehicle must be brand new when you purchase it
  • The car must be less than a year old when it’s totaled
  • The car must have fewer than 15,000 miles on it

Is it worth the added premium?

Not all insurers have the same New Car Replacement restrictions. Some will offer protection for the car for longer than others. You will have to assess the costs of the added coverage because it’s not free.

After looking at the cost and comparing it to depreciation charges, you’ll be able to decide if you want to take on the risk or not.

You don’t want a collision to be the reason that you go from driving the car of your dreams to a standard vehicle without any bells and whistles. This is why you have to consider costs and benefits before doing anything else.

To find out how much it will cost you, get instant quotes now. By using our online rate quote tool, you can compare pricing in minutes.