Replacement cost: Full value, no depreciation

3 minutes

You've worked really hard to buy the car of your dreams. Every detail matters—the new car smell, gleaming paint, spotless dashboard, and above all, the pride of holding the keys.

Then one morning, you step out. Your driveway is empty. Your car is gone. The shock is overwhelming, as if months of effort vanished in an instant. No need to panic! If this happens, replacement cost coverage gets you back behind the wheel in a car that’s just like the one you drove off the lot—no depreciation, no hassle.

What is replacement cost coverage?

It’s an add-on to your car insurance that reimburses you for the full value of your car, without factoring in depreciation, whether you leased or purchased.

Total loss? You’ll get a brand new car with the same specs or a cash payout equal to the original value.

Partial loss? Damaged parts are swapped for new originals.

As the name suggests, this coverage is ideal for new cars. You can add it when you purchase your car and enjoy full-value coverage from the get-go.

Do I keep this coverage for good?

Definitely not! You benefit from replacement cost, especially at the beginning. It's generally offered until the fourth or fifth year, depending on who you’re insured with.

Once it expires, your car will be covered based on its actual value at the time of the claim.

Is replacement cost mandatory?

No, it’s completely up to you whether you’d like to include it as an add-on to your contract.

But here’s the thing. It’s a smart choice if you’re in one of these situations:

  • When you’re buying or leasing a new car, especially a luxury vehicle, it depreciates fast in the first few years, making them costly to replace.
  • When your financed car is totalled, this coverage keeps you from footing the bill for a car you can no longer drive.

And how does it differ from replacement insurance?

People often confuse the replacement cost (This hyperlink will open in a new tab) with replacement insurance (This hyperlink will open in a new tab), but they’re not exactly the same thing.

Both replacement cost coverage and replacement insurance aim to bridge the gap between your car’s purchase price and depreciation.

But here’s where they differ. With replacement insurance, you pay a single, fixed premium upfront. If your car is stolen or totalled, you must replace it with a new model with similar specs from the dealership of your choosing. Otherwise, the coverage won’t apply.

When compared over the same coverage period, replacement insurance costs more than replacement cost coverage.

Why choose replacement cost?

Your standard car insurance only covers the actual cash value of your vehicle—what it’s worth on the day of the loss—not what you paid for it.

Let's take a look at our example. Let’s say you bought your car for $40,000 four years ago. At the time of the theft, it was worth $15,000.

Here’s what you could receive for your claim:

  • Without replacement cost coverage: you’ll get $15,000—the car’s current value.
  • With replacement cost coverage: you’ll drive off in a brand-new equivalent model. So $40,000 or more (if you factor in inflation).

Sounds great, right? But here’s the reality:

Your basic car insurance will only pay what your car was worth when it was stolen, not what you paid for it. So if you want a new car similar to the one you had, you’ll need to cover the $25,000 difference yourself. And let’s be honest, that probably wasn’t in your budget.

A few words about depreciation

As soon as you drive off the lot, the value of your car starts to depreciate right away. And just how much?

  • In the first year, it drops by 20% to 30%.
  • After three years, it drops by about 50%.

Need the hard numbers? A depreciation calculator (This hyperlink will open in a new tab) is the best way to find out.

What impacts a car’s value:

  • Make and model
  • Condition
  • Mileage
  • Maintenance quality
  • Accident history
  • Colour (Unusual or customized colours can reduce the resale value.)

Thinking of adding replacement cost to your car insurance?

Check your contract first. Make sure replacement cost  is included. It may also appear as Q.E.F No. 43.

Speak to your insurer before renewing your policy or buying a new car. Compare your options and look at the benefits and costs of replacement cost coverage.

Assess your needs and budget. This coverage comes at a cost so make sure it fits your situation.

This coverage applies as long as your insurance contract is in force. The cost is reviewed at each renewal.

“Lighter” roads ahead

Replacement cost means peace of mind. Your investment is protected and you can get back on the road without unpleasant surprises.

Looking for car insurance with replacement cost? Request a quote online.