More on Home Insurance
More on Home Insurance
An extended replacement cost endorsement increases your home’s insured value an additional 25% to 50% above your dwelling coverage limit.
The core part of a homeowners insurance policy is the coverage that insures the home itself — your dwelling coverage. When you file a dwelling coverage claim, you’re typically reimbursed at the home’s replacement cost, meaning your insurer will pay to repair or rebuild the home up to your coverage limit without deducting depreciation.
By upgrading your dwelling coverage to extended replacement cost, you’re insured for anywhere from 125% to 150% the rebuild cost of the home, depending on how much coverage you get.
So why would you want to be insured for more than the rebuild cost of your home?
A standard replacement cost policy will reimburse you for the amount indicated in your policy. You can even update your coverage limit to account for any upgrades or renovations you make to your home. But there are certain things you can’t control — namely the inflated costs of building materials and labor after a natural disaster. That’s where extended replacement cost comes in.
With standard replacement cost, you’re reimbursed the amount to replace or restore your home to its condition before it was damaged. Keep in mind that replacement cost isn’t the market value of the home or the assessed value; it’s determined by how much it would cost to rebuild the home.
Extended replacement cost is an upgrade, or endorsement of your standard replacement cost claim settlement terms. With extended replacement cost, your insurer pays for your home to be rebuilt or repaired to its condition before the damage even if the loss amount is above your dwelling coverage policy limits. Most insurers give you the option of extending your coverage an additional 25% to 50% of your dwelling coverage limit.
For example, say you insure your home at its replacement cost of $500,000. A few months later, a hurricane makes landfall and destroys your house and several others in your region, causing construction and labor costs to skyrocket. It’s then determined that your home now costs $700,000 to rebuild, leaving you with a $200,000 deficit.
If you had 50% extended replacement cost in that situation, your dwelling coverage would have automatically increased to $750,000 once rebuild costs exceeded your initial limit. As we’ll detail in the next section, the additional coverage is more than worth it.
Most major home insurance companies offer extended replacement cost at an additional cost — typically an additional $25 to $50 annually, depending on if you go with 25% or 50%. (However, if you live in close proximity to the coast or areas prone to natural disasters, your insurer may charge more for this endorsement.)
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If you live in an area prone to tornadoes or coastal regions that experience a high volume of tropical storms, extended replacement cost is a no-brainer for the value at which it can be acquired.
Often, homeowners think that if they get their home appraised once in a while and update their coverage amounts to reflect any cosmetic or structural home improvements, that’s enough coverage. But all it takes is one weather catastrophe or extenuating circumstance that’s out of your control to leave you uninsured.
With extended replacement cost, you have the peace of mind of knowing that a major loss won’t leave you trying to recoup the loss out of pocket.
A handful of insurance companies in certain parts of the country also offer guaranteed replacement cost, which will pay you whatever it costs to rebuild your home as it was before the loss. That means if your home’s rebuild cost doubles or even triples, you’re covered.
Check with your insurance company to see if they offer extended or guaranteed replacement cost, or call and speak with a licensed home insurance agent at Policygenius who can make sure you have a sufficient amount of coverage for your home.
Pat Howard is a homeowners insurance editor at Policygenius in New York City. He has written extensively about home insurance cost, coverage, and companies since 2018, and his insights have been featured on Investopedia, Lifehacker, MSN, Zola, HerMoney, and Property Casualty 360.
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