When buying a home, you’re usually focused on the fun aspects, like painting the kitchen a different color or figuring out what to plant in the front yard.
The last thing you want to think about is a list of unfortunate events that could potentially come knocking, like a fire or a bad storm.
But with homeownership comes the responsibility of shopping around for homeowners insurance, so it’s pretty much inevitable.
While you’ll have to consider personal property and liability coverage, the core part of your homeowners insurance will be your dwelling coverage, or the financial protection for the home itself.
This brings up the big question: If your home is seriously damaged or destroyed, how much protection will you need to cover the costs?
This is where extended replacement cost insurance comes into play. Learn how this coverage option can help you get back to normal in the event of a disaster.
What does extended replacement cost cover?
Say you lose all or most of your home to a disaster, like a fire or a tornado. When you file a dwelling coverage claim, you want to be reimbursed for the cost to repair or replace your home, right?
If you have standard replacement cost coverage, your insurer will pay to return your home to its original condition. But only up to the coverage limit on your policy.
But with extended replacement cost, you would be reimbursed for a certain percentage over your policy limit, typically between 10 percent and 25 percent.
For example: Say your home has a dwelling coverage limit of $300,000. And you have extended replacement cost that insures you for 125 percent of your policy limit. Your insurance company would actually reimburse you up to $375,000.
How do you determine the coverage limit for extended replacement cost?
But why would you want coverage that is more than the expected cost to rebuild your home?
Because your standard replacement insurance might fall short due to unforeseen factors. These factors could be an increase in building materials and labor costs. This is especially true after natural disasters. A lot of people in your area might find themselves in the same scenario. This means big demand and short supply.
Extended replacement cost insurance will give you a bump in coverage that will offset any of those expenses you just can’t plan for.
Your insurance agent can help you determine the coverage limit for your home. But it also doesn’t hurt to do some estimates yourself.
You can find the rough amount you’d need to replace your home by multiplying the total square footage by local, per-square-foot building costs. You can find out local construction costs by reaching out to a local real estate agent, your insurance agent, or a builders association in your community.
Other factors that can determine your limit amount include:
- The type of exterior wall material
- The number of bathrooms
- Type of roof
- Other structures on the property, such as a garage
- Special features, like fireplaces, arched windows or custom built items
- Any improvements that may have increased the home’s value
How does it compare to other coverage options?
Along with extended replacement cost, your other options are: guaranteed replacement cost, replacement cost, and actual cash value.
Your choice will determine how your claim is settled. And it determines the actual value of your protection, and the price of your insurance premium.
Standard replacement cost
Say your home is badly damaged or destroyed, and you have standard replacement cost coverage. You would be reimbursed the amount it costs to restore or rebuild your home to the same condition it was before. But only up to your dwelling coverage limit.
This coverage doesn’t deduct for depreciation or use the home’s current market value to determine the payout, but your policy will have a set limit.
So, if building costs or labor are higher than normal and the ending price tag exceeds the limit, you’ll be stuck with those extra costs.
This coverage option is usually the standard in homeowner’s insurance policies, so you might already have this. But it’s always best to double check.
Guaranteed replacement cost
If standard replacement cost covers you up to your policy limit, and extended replacement cost covers you up to a certain percentage over your limit, think of guaranteed replacement cost as the option that takes it another step further.
Guaranteed is the keyword here. Your insurer will reimburse you the cost it takes to rebuild your home to its previous condition, regardless of price or your home’s value. In other words, there is no cap on what it takes to get your home back to its original form.
But keep in mind, this coverage isn’t offered by all insurers or available in every state. Plus, it’s considerably more expensive than the other options.
Actual cash value
ACV claims can get tricky since you can calculate depreciation in many different ways, depending on your location and insurer. But typically, it’s determined by considering the replacement cost and subtracting a percentage of value for each year since purchase.
Actual cash value insurance can save you money on your premium, but it typically isn’t the best option for the average homeowner.
The ACV will almost always be lower than the replacement cost. This leaves you on the hook to cover the remaining price of rebuilding your home to its original glory.
If you have a lot in savings and assets and want to save on your monthly bills, you could probably afford to go with ACV insurance — but why take the chance?
With any of the other replacement cost options, your insurer will foot the bill without considering depreciation. And this can help cover unexpected expenses like labor and material cost increases.
How much does it cost?
Considering how much extra protection you get with extended replacement cost, you’d expect the price you’d pay for it to be expensive.
And yes, it does raise the cost of your homeowners insurance. But it probably isn’t as much as you think.
Factors such as your insurer, the location and value of your home, and even your credit score affects the price. But you can expect to spend an additional $25-$50 annually for this boost in coverage.
Considering that the average homeowner pays $1,083 for homeowners insurance, that comes out to around $100 a month. It just depends on how much coverage you want.
When you compare that monthly cost to the prospect of falling thousands of dollars short on the cost to rebuild your home after a disaster, it doesn’t seem like so much.
When do you need it and is it actually worth it?
How can you decide if standard replacement cost coverage is enough? How do you know if you need to pay for the extended coverage? Here are a few factors to consider:
First, if you live in an area that is prone to natural disasters, it might be in your best interest to spring for extended replacement cost coverage.
Hurricane prone states such as Florida, Texas, and Louisiana lead the national average for homeowners insurance premiums. They come in at $2,055, $1,947 and $1,847 respectively.
Homeowners in those areas might not like the idea of extra coverage. It’ll raise the already high price for premiums. But thinking about the potential astronomical prices that could happen down the road puts the extra monthly fee into perspective.
Having that extended coverage can come in handy. It’ll get you back to your standard of living without having to foot the bill.
If you own a second property and the urgency to rebuild after a disaster isn’t on the table, you could consider skipping extended replacement cost coverage. But again, if it’s in a high-risk area, it might just be worth it regardless.
Other factors to consider: your overall financial health and how much you value peace of mind.
Sure, you might have enough assets to cover any surprise expenses. But if it’s something that weighs on your mind, the slightly higher premium might be worthwhile.