In case disaster strikes, you want your home insurance coverage to be sufficient to rebuild your home's structure, replace your belongings, and defray costs if you are unable to live in your home.
Standard homeowner policies typically provide coverage for disasters caused by fire, hail, lightning, and explosions. Those who reside in areas where the risk for earthquakes and floods are present will need coverage for those disasters.
Replacing your home after the damage is not only stressful, it can be very costly. Often, the cost to rebuild is way higher than anticipated. This is where extended replacement cost coverage can come in very handy.
With extended replacement cost, a financial cushion exists if the cost of rebuilding is more than the replacement cost estimated. For instance, if the cushion is 25% above the dwelling amount, you will receive an extra $75,000 if your home is insured at $300,000.
However, if the cost goes beyond the extra $75,000, you either find a way to cover the difference or rebuild a smaller home. On the other hand, guaranteed replacement coverage will cover for the full cost of rebuilding the house back to its previous specifications and size.
Extended Replacement Coverage vs. Guaranteed Replacement Coverage
If you can't decide if an extended or guaranteed replacement coverage is right for you, knowing the difference between the two can help.
Extended Replacement Cost
Simply put, extended replacement cost is an expansion of the current dwelling coverage limit. This can help cover the extra rebuilding costs that are beyond your control. While some homeowners increase their coverage each time they renovate or make upgrades to reflect the new value, there are instances when the cost of rebuilding goes beyond what is expected.
How Extended Replacement Cost Works
Many insurance companies offer extended replacement coverage to regular homeowners insurance policy in increments, typically between 10% and 50%. This can ensure you'll be covered financially when the cost of rebuilding the home is more than the original dwelling coverage limit.
Extended replacement cost coverage is especially beneficial for homeowners who live in areas prone to natural disasters such as floods, earthquakes, or hurricanes. It is crucial to remember that the more properties a major catastrophe destroys, the higher the demand for construction labor and materials.
When Extended Replacement Cost Protection is Ideal
Some experts recommend that homeowners get additional replacement cost coverage, especially those living in high-risk areas like earthquakes or flood zones. It is also important to remember that construction costs can vary from one year to another, so it is smart to update your replacement coverage to reflect the new reality.
Guaranteed Replacement Cost
Guaranteed replacement cost is a form of coverage enhancement that provides the highest coverage level—a full home rebuild after a complete loss, regardless of the cost. Generally, this policy add-on is expensive, especially for those living in disaster-prone areas.
Guaranteed replacement cost is considered ideal for homeowners living in high-risk areas where labor and construction costs can rise in the wake of a natural disaster. Those who get guaranteed replacement costs won't have to worry about being underinsured as they are fully covered regardless of how much the rebuild costs.
How Guaranteed Replacement Cost Works
With guaranteed replacement cost, there is no coverage limit. In other words, the company agrees to reimburse you fully regardless of the amount. This means you won't have to worry about covering for any unexpected spikes in reconstruction costs as you will get a full insurance payout.
How Much a Guaranteed Replacement Coverage Costs
The price of adding guaranteed replacement coverage can vary from one company to another and from one location to another. However, if you live in high-risk areas, the insurance company will likely charge you way more.
Ideally, homeowners should have some additional replacement cost average. For those who live in high-risk areas, a guaranteed replacement cost might be best. If you are unsure which one to go for, speak with your insurance company so you'll get guidance on how to move forward.
Guest Writer: Rachel Harper