How Much Money Will You Need To Borrow?

How Much Money Will You Need To Borrow?

| April 22, 2021

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 are typically reimbursed at the home's replacement cost, meaning your insurance company/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 are insured for anywhere from 125% to 150% the rebuild cost of your home, depending on how much coverage you get.  

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 cannot control--namely the inflated costs of building materials and labor after a natural disaster or pandemic.  That is where the extended replacement cost comes in. 

How Does an Extended Replacement Cost Work? 

With a standard replacement cost, you are reimbursed the amount to replace or restore your home to its condition before it was damaged.  Keep in mind that replacement cost is not the market value of the home or the assessed value; it is determined by how much it would cost to rebuild the home.  

An extended replacement cost is an upgrade and an endorsement, which can be added to your policy.  With extended replacement cost, your insurance company/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:

  • 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 is then determined 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 will detail in the next section, the additional coverage is more than worth it. 

How Expensive Is Extended Replacement?

Most major home insurance companies offer extended replacement cost at an additional cost---typically, and additional $25 to $50 annually, depending on if you go with 25% or 50%.  However, if you live near the coast or areas prone to natural disasters, your insurance company may charge more for this endorsement.

When Do You Need Extended Replacement Cost? 

If you live in an area prone to tornadoes or coastal regions that experience a high volume of tropical storms (or during a pandemic), 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 occasionally and update their coverage amounts to reflect any cosmetic or structural home improvements, that is enough coverage.  But all it takes is one weather catastrophe or extenuating circumstance that is out of your control, to leave you uninsured.

With extended replacement cost, you have the peace of mind of knowing that a major loss will not leave you trying to recoup the loss out-of-pocket. 

Consider Guaranteed Replacement Cost

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 homme as it was before the loss.  This means if your home's rebuild cost double or even triple, you are covered. 

Check with your insurance agent or speak with one of our licensed home insurance agents at Consultative Insurance Group to learn more about extended replacement cost and/or guaranteed replacement cost.