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January 21, 2021

Avoid depreciation when insuring your brand new car

4 min read


When you buy auto insurance, the assumption is that you are insuring your car for its actual cash value (ACV) at the time of an accident, which is the purchase price, minus depreciation.

That means if you total your 3-year-old car, the insurance payout won’t be enough to buy a comparable new model. To insure your new vehicle for replacement cost (meaning so you can buy a new one), you need either gap insurance, bought through your finance company, or a waiver of depreciation, bought through your auto insurer.

There’s nothing better than that new car smell. So when you buy a new vehicle, it might be a good idea to make sure that your insurance also has it. With most collision insurance policies, the insurance company insures your car for its current street value, which drops by 10-20% the second the car leaves the lot, and continues to drop by about 20% a year after that. It’s called depreciation, and it happens faster with vehicles than most other things. There are a couple of ways to avoid depreciation, and make sure that if your car is damaged beyond repair, you’ll be able to get a brand new vehicle to replace it.

Waiver of depreciation (OPCF 43)

By paying $75 extra in the first year and as little as $300 five years down the line, you can add a waiver of depreciation endorsement to your policy (OPCF 43), which means that if your car is “written off” in an accident, your insurance company will pay to buy you a new car of the same make and model, that is similarly equipped as the car you lost. Of course, as always, you will pay the deductible.

An example of how a waiver of depreciation works:

In 2021, you pay $37,500 for a new truck. In 2023, the truck is damaged beyond repair in an accident. Although the ACV of the truck at the time is around $29,500, the insurance company pays you the full $37,500 (minus your deductible), and you’re able to pay off any outstanding loans and buy another brand new truck.

Gap insurance

If you’re financing your new vehicle, your lender rep will likely offer you gap insurance on your car loan. Gap insurance is actually an acronym (Guaranteed Asset Protection), but it works well regardless, because it is insurance for the gap between what the insurance company pays you and what you still owe your lender. It’s not the same as a waiver of depreciation, but it serves a similar purpose. It basically guarantees to wipe out any outstanding debt you might have on the vehicle if it should be written off.

An example of how gap insurance works:

In 2020, you bought a new car for $42,500, got it financed over 7 years, and got the gap insurance. In 2022, the car is damaged beyond repair. Based on the financing terms, at the time of the accident, you still owe $37,000 on your car loan, but your insurance company only pays you the ACV of the car at the time – $34,500 (minus your deductible). At this point, the gap insurance kicks in the $2,500 to fill in the gap, so you’re not left owing money on a car that no longer exists.

What’s better? Gap insurance or waiver of depreciation?

As with most questions related to financial products, it’s pretty simple math, and it’s largely a matter of making trade-offs. With gap insurance, you usually pay a lump sum that is added to your total loan amount (so you pay a slightly higher monthly payment), and the value of the insurance decreases with time, as your monthly payments start to catch up with depreciation.

Buying a waiver of depreciation, on the other hand, will give you more protection as time passes, but will also cost more with every passing year. If you want to keep your payments steady, and just want to protect against being in debt, you probably want gap insurance. But if you really love that new car smell, and don’t want to settle for whatever your car is worth on the street, then a waiver of depreciation is the only way to go.

There’s so much to think about when buying a new car. Let one of our car insurance brokers walk you through all your options and then surprise you with an awesome rate for the coverage you want from one of our 40+ insurance company partners. Call before you buy, after you buy, heck, call us from the dealer. We’re here to help.


Can I buy both gap insurance and a waiver of depreciation?

You probably can, but you’ll only be able to claim one of the two if your vehicle is a total loss, so it’ll be a waste of money.

Who can sell me gap insurance? Who can sell me a waiver of depreciation?”

Your lender (whoever gives you a car loan) would sell you gap insurance, since it’s insurance related to your car loan. On the other hand, only your auto insurer can sell you a waiver of depreciation since it is an endorsement that is part of your larger auto insurance policy.

How long does a waiver of depreciation cover me? How ‘bout gap insurance?”

Gap insurance covers you as long as the amount you owe on your car loan is greater than the Actual Cash Value (ACV) of your car. The time period will vary depending on how much down payment you put down and how long the term is on the loan.

For a waiver of depreciation, some insurers will only allow you to apply the waiver for the first two years, and others will allow it until the car is 5 years old. You must be the first owner of the car.

What is replacement value insurance?

In insurance, you can insure an item for its replacement value (what you paid) or for its Actual Cash Value (what you could sell it for). In Ontario, when you purchase a waiver of depreciation endorsement (OPCF 43), you are essentially insuring for replacement value, meaning that in the even of a total loss, the insurer will pay the lowest of:

  1. The actual purchase price;
  2. The manufacturer’s suggested list price on the original date of purchase; or
  3. The cost of replacing the vehicle with a new one of the same make and model, similarly equipped.

How much does gap insurance cost?

Gap insurance costs between $500 and $1,000, depending on the purchase price of your vehicle and other factors. It is a one-time fee that is added to the total of your car loan.

How much does a waiver of depreciation cost?

A waiver of depreciation costs $75 in year one, growing to up to $300 in year 5. You’re never obligated to continue paying for the waiver, so if you only want it for 1 year or 3 years, those are the years you’ll pay for.

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