The replacement cost of your home is an essential part of any home insurance policy. It's the amount of money your insurance company will pay to repair ore replace your home. Home replacement cost is calculated using all of the known facts about your home; it's size, construction type, features and more.
It's easy to underestimate construction costs, especially as inflation causes big increases, and it's not unusual for a home to become underinsured over time, just because costs have gone up. Most people don't think about the possibility that they need to review their home insurance coverage.
TIP"Insurers generally recommend that homeowners have a yearly conversation with their insurer or agent to go over their coverages, any renovations, major purchases, or remodeling that may have occurred," says Karen Collins, assistant vice president for the American Property Casualty Insurance Association. The APCIA is a national trade association for home, auto and business insurers.
Whether you have made improvements to your home or it simply costs more to rebuild than it did a year ago, you don't want to find out when disaster strikes that you don't have enough insurance. That's where extended replacement cost comes in. Read on for more.
What is extended replacement cost?
Extended replacement cost coverage is an endorsement, or add-on, to your home insurance policy that acts like a buffer to help safeguard against cost overruns. It essentially extends your coverage so you can hopefully rebuild the home you once loved, including the marble countertops and upgraded hardwood floors.
What you pay for extended replacement cost coverage varies according to insurer, but it can generally be purchased in increments of 10% to 50% above the basic dwelling coverage.
Here is an example:
- Your home is destroyed by a fire and your policy's dwelling coverage is $300,000.
- Due to inflation, the actual cost to rebuild the same home is $350,000, which would leave you $50,000 short. Money that would have to come out of your savings or by making sacrifices on features in the rebuild.
- If you have a 25% extended replacement endorsement on your policy, your dwelling coverage would increase up to $375,000, easily covering the extra costs.
“This type of coverage is widely available and highly recommended by insurers, especially if you live in an area prone to large-scale natural disasters like hurricanes or wildfires,” Collins says.
How to calculate how much extra coverage you need
There is no sure way to predict how much extra coverage you may need in the event of a disaster, but there are several ways to get a better handle on how much it would cost to rebuild your home today.
A good place to start is by having that conversation with your insurer. Insurers regularly update coverage limits based on construction cost information provided by builders in local markets. This has become particularly critical in the current environment.
"I would not buy homeowners insurance without an inflation guard," says Bill Wilson, who served as the associate vice president of research for the Independent Insurance Agents & Brokers of America until 2016 and now advises the industry.
Another good strategy is to look at the build prices of new homes in your area. This could be done as simply as attending a few new home open houses and talking to builders about the average cost per square foot to build a home similar to yours, with similar features.
If your home has a number of custom features or upgrades, it may be wise to hire a professional appraiser. The appraiser can physically inspect your home and come up with a much more accurate estimate of replacement costs right down to the countertops, custom cabinetry, bathroom features and flooring.
How much is extended replacement cost?
Determining how much extra this will cost is best determined by talking to your insurer. Online insurance company Hippo, for one, says you can expect to pay in the range of $50 and up for the addition. Pricing will vary depending on the size and features of the home, as well as location.
Be prepared to pay a little more if you live in an area that is at increased risk for such threats as wildfires, floods or hurricanes.
Extended replacement cost vs. guaranteed replacement cost: What’s the difference?
If you're looking for absolute certainty that all replacement costs will be covered, no matter the circumstances, there's one further product to consider: Guaranteed replacement cost coverage.
That one word – guaranteed – is the key difference. Guaranteed replacement cost coverage will pay for the cost of rebuilding your house back to its previous size, features and specifications.
TIP"Guaranteed replacement cost coverage was designed to give a policyholder total peace of mind that their property would be fully covered without the risk of running out of funds," says Collins.
Not all insurance companies offer guaranteed replacement cost, and it may cost a little more than an extended endorsement, but it could save you a lot of money if you need to file a major claim.
