Q

What is guaranteed replacement cost?

A

Guaranteed replacement cost is an optional homeowners insurance add-on that pays the full cost of replacing your house after a disaster, even if this amount exceeds your policy limits.

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Guaranteed replacement cost is a homeowners insurance endorsement that ensures you’ll be paid the full amount to rebuild your home after a disaster, regardless of how much it costs. That means if your house is destroyed by a fire or severe storm, your insurance will pay to rebuild it to the way it was before the disaster — even if the cost is double or triple your policy’s dwelling coverage limit. 

While guaranteed replacement cost can often be an expensive policy add-on, it’s well worth the added cost if you live in an area prone to large-scale natural disasters.

Key Takeaways

  • After natural disasters, demand for construction materials and labor is typically high, which causes home rebuild costs to skyrocket.

  • If the cost to rebuild your home is higher than your policy’s dwelling coverage limit, guaranteed replacement cost can pay the additional amount so you’re not left covering the gap out of pocket.

  • Availability of this coverage varies by company and location.

How does guaranteed replacement cost work?

Under standard homeowners insurance, your home is covered at its replacement cost. This means if your house is damaged or destroyed, insurance will pay to restore it to its condition before the loss occurred, without factoring in depreciation. 

However, you’re only covered up to the limit specified in your policy. So if your home is insured for $300,000 but it costs $350,000 to rebuild after a disaster, you’ll have to either pay the extra $50,000 out of pocket or build a less expensive home.

With guaranteed replacement cost, homeowners insurance pays whatever it costs to rebuild your home to its previous size and specifications. This coverage is often recommended for homes in areas prone to wildfires, tornadoes, and hurricanes. 

Rebuilds costs tend to spike in the wake of natural disasters, as there is a concentrated demand for lumber, roofing, and other construction materials in impacted communities.

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Extended replacement cost vs. guaranteed replacement cost: What’s the difference?

Extended replacement cost is essentially a tier below guaranteed replacement cost in the home insurance coverage hierarchy. While it also provides you with a coverage cushion in the event of an expensive rebuild, the limit increase is capped at a specified percentage — usually in increments of 25% to 50% of your policy’s dwelling coverage limit. 

Let’s look at an example. 

Imagine you own a house that’s insured for $400,000. One day, a major storm rolls through and destroys your home and several others in your community, sending labor and construction prices through the roof. Suddenly, your home costs $650,000 to rebuild — $250,000 more than your policy’s stated limit. Here’s how much you’d be reimbursed on a claim for each policy level.

Coverage levelDwelling coverage limitClaim payoutOut of pocket expenses after payout
Standard replacement cost coverage$400,000$400,000$200,000
Extended replacement cost of 125%$500,000$500,000$150,000
Extended replacement cost of 150%$600,000$600,000$50,000
Guaranteed replacement costFull rebuild amount$650,000$0

Which companies offer guaranteed replacement cost?

While availability can be limited depending on your state and region, there are several insurance companies that offer guaranteed replacement cost coverage, including: 

How much is guaranteed replacement cost?

While price will generally vary by company and location, guaranteed replacement cost coverage is one of the more expensive home insurance policy add-ons, and usually costs around 5% to 10% of your total policy premium. That means if your policy has an annual premium of $1,000, adding guaranteed replacement cost would likely cost an extra $50 or $100 a year. 

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