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Auto: Should you Take Out Replacement Insurance?

07 June 2019 by National Bank of Canada
Replacement insurance

Replacement insurance or a replacement cost endorsement? According to a survey from the Chambre de l’assurance de dommages (ChAD), some 22% of vehicle owners or lessees purchase both. Yet the two products meet the same need, so which one should you choose?

What is the difference between replacement insurance and a replacement cost endorsement?

Unless otherwise stated, your basic auto insurance covers the real value of your vehicle. However, the value drops quickly. CAA-Quebec estimates that a car loses approximately 30% of its value in the first year.

Your loan balance drops less quickly. In case of theft or a total-loss accident where the insurer determines it is not possible to repair your car, the compensation could be lower than the amount you have left to repay on the car loan. Replacement insurance and a replacement cost endorsement fill this gap and allow you to get back on the road with a new vehicle.

The two products have several differences:

  • Replacement insurance

This coverage is suitable for new passenger vehicles, as well as demos and used vehicles. It is also available for ATVs, snowmobiles and some luxury cars that are not eligible for a replacement cost endorsement.

This type of protection allows you to replace your car with a new equivalent model at the same dealer, or you could even receive a sum of money to purchase a similar vehicle at another dealership. In this instance, you must specify this option when you sign the contract. Otherwise, you will be obligated to replace your vehicle at the original dealer. If you decide not to replace your vehicle, no other type of compensation is paid.

Replacement insurance is often taken out with the dealer, but it is also offered by insurance agents and brokers. That’s why, when making a claim, you may have to submit it to two insurers: the first for basic insurance and the second for replacement insurance.

  • Replacement cost endorsement

A replacement cost endorsement is only for new vehicles and some demo vehicles with limited mileage.

This endorsement covers the replacement of your vehicle for a similar one at the dealer of your choice. However, you can also choose to receive a cash compensation. Therefore, compensation is available even if you decide to take the bus rather than purchase another car.

This coverage is a simple addition to your basic auto insurance. You can only take it out with an insurance agent or broker. In the event of a claim, you submit it to only one insurer. 

What are the advantages of replacement insurance?

In case of theft or an accident, you must pay a deductible to your basic auto insurer. It will, however, be reimbursed by your replacement insurance.

The premium is established based on the value of your vehicle and the duration of your contract. Since your driving record is not taken into account, this type of coverage could be advantageous if you have several recent claims.

The cost of replacement insurance is fixed for the duration of the contract, and the coverage period can last up to eight years. If the premium is paid using the vehicle financing, you will, however, have to pay additional interest.

What are the disadvantages of replacement insurance?

Replacement insurance is generally more expensive than a replacement cost endorsement. However, the costs of an endorsement increase every year, particularly after two years. This could amount to between $200 and $1,000 over five years, according to the ChAD.

Only equipment and accessories indicated in the purchase or lease contract are covered. If you decide to install a new stereo system, you will not receive compensation for it. With a replacement cost endorsement, it would be covered. 

Replacement insurance is often offered by the dealer at the very end of the sales process. In this context, you will have less time to think about the best solution for you. Yet this decision must not be made lightly.

How to cancel both contracts

If it happens that you took out replacement insurance with the dealer and you regret your decision, you have ten days to cancel the contract at no cost. To do so, you must notify the dealership via registered mail. After this time, fees apply.

If you have taken out replacement insurance with an insurance agent or broker, you can cancel it at any time. You must, however, pay the fees indicated in the cancellation table that accompanies your policy.

There are no cancellation fees for a replacement cost endorsement. When it comes time to renew the contract, you can choose not to continue the coverage. If you choose to cancel at another time, you will be reimbursed proportionally.

An informed decision

It is important to analyze your needs so you are properly covered. Since one of these two insurances is sufficient, learn about which protection corresponds to your situation. For example, buying an exotic car, owning several vehicles or frequently travelling in a car while abroad are scenarios that can influence the type of coverage you prefer. That’s why a broker can offer you custom solutions for replacement insurance and a replacement cost endorsement.

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