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Replacement value insurance; do you need it?

You just made the second most important purchase of your life: you just bought a new car. Great, brilliant even, she smiles at you and is just waiting for you to hope in and enjoy the open road. Before you can get behind the wheel, however, you still have some decisions to make, including whether you should opt for replacement value insurance.

replacement value

While the answer may seem obvious, the issue deserves some consideration. With replacement value insurance, you will receive a car of equivalent value to your new vehicle, even after a few years of driving and regardless of depreciation, in the event of an accident.

Let’s say, for example, that your vehicle now has 30,000 kilometers, and two years of wear, and you are the victim of a violent accident which completely destroys the car. With replacement value insurance, you would be able to go out and get a vehicle that is the same value as your current model… two years ago when it was new. You do not therefore suffer the consequences of depreciation.

“If you do not have this protection, you would receive an amount equivalent to the value of the vehicle at the moment you have your accident. After two years, that amount will be between 30 and 50 % less than the amount you paid to buy the car new,” says a sales representative at Portland Street Honda.

Replacement value or replacement guarantee?

Here the distinction is subtle. While the replacement value is usually provided by your insurer for a limited period of four years, the replacement guarantee is available from your dealer and is often a slightly longer duration. However, there is an important detail to remember: the replacement guarantee does not give you an amount of equivalent value to the price you paid for your current vehicle, but rather allows you to buy the same car at later date. If you have a 2015 model, let’s say a 2015 Honda Civic LX, then with replacement guarantee, should you have an accident in 2018, you would get a 2018 Honda Civic LX. There is therefore less freedom, but if you like your car, you can always compare to see which insurance is less expensive.

Back to replacement value protection, it is also available for pre-owned vehicles. The allowance is calculated from the sales price of the vehicle, and then indexed by 5% per year to account for inflation.

It is true that the replacement value or its counterpart, the replacement guarantee, will cost you a few extra dollars. On the other hand, they could save you quite a bit in the future.

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