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When you buy homeowners insurance, the dwelling coverage portion of your policy helps you pay to rebuild your home if it’s damaged by a covered event, such as a fire.
But is your current dwelling coverage limit really enough to rebuild your home if it’s completely destroyed? In times of rising demand for materials and labor, it might not be. Fortunately, you can purchase an extended replacement cost endorsement to ensure you’re financially protected from unexpected cost increases.
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What is extended replacement cost?
Extended replacement cost is an endorsement to your homeowners insurance policy that changes the terms of the original policy. It provides an extra layer of protection in case you need to rebuild your home due to damage by fire, a severe storm, or another covered disaster.
Extended replacement cost increases your policy’s dwelling coverage limit by an extra 10% to 50% of the cost to rebuild your home. The extra coverage does come with an extra cost, but it could be well worth the additional premium if you live in a high-risk area or building or material costs are rising rapidly.
How does extended replacement cost work?
Many insurance carriers offer extended replacement cost coverage as an add-on to your standard homeowners insurance policy. They typically offer it in increments, as a percentage of your normal dwelling coverage limit.
For example, let’s say your home is insured for $250,000 when it’s leveled by a wildfire. Every homeowner in your community who lost their home during the fire needs to rebuild, so the demand for labor and materials rises, bringing extra costs along with it.
If it costs $275,000 to rebuild your home rather than $250,000, you’d have to come up with the difference yourself under standard replacement cost coverage. But if you have extended replacement cost coverage that adds another 25% of coverage, your new coverage amount is $312,500 ($250,000 x 1.25). That’s more than enough to cover the cost of rebuilding your home.
Extended replacement cost covers the additional costs associated with rebuilding your home after it’s been damaged or destroyed, if the loss is greater than 100% of your coverage limits.
It’s important to note that extended replacement cost only impacts Coverage A (dwelling coverage), which pertains to damage to your house. It doesn’t increase limits for other types of coverage that are normally included in a homeowners insurance policy, such as:
- Coverage B — Other structures, like a detached garage or shed
- Coverage C — Personal property, including household furnishings and personal belongings
- Coverage D — Additional living expenses when you can’t live in your home due to a covered loss
Any additional costs above coverage in these areas are still your responsibility as the homeowner.
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Do you need extended replacement cost coverage?
So, how do you know if it makes sense to add extended replacement cost coverage to your homeowners insurance policy? The following questions can help you decide:
- Do you live in an area that’s prone to natural disasters? Paying the extra premium for extended replacement cost coverage usually makes sense for people who live in areas that are prone to natural disasters, such as hurricanes, tornadoes, earthquakes, and wildfires. In these areas, there’s a higher risk of having a large number of homes in the area severely damaged or destroyed, which temporarily drives up the cost of building materials and labor.
- In the event of a major loss, will you urgently need to rebuild? If the home in question is a vacation home, then you may not need to worry about rebuilding as quickly as possible. You can wait until rebuilding costs return to normal levels without disrupting your daily life. On the other hand, if it’s your primary residence and a major loss would leave you without a place to live, then extended replacement cost coverage can help you rebuild as quickly as possible.
- How financially secure are you? Wealthy homeowners might be willing to accept more risk, knowing they can cover uninsured losses out of their own savings. But if coming up with an additional $25,000 to $50,000 or more to rebuild your home would cause a significant financial hardship, then paying a little extra for extended replacement cost coverage might be worth it.
- Are construction prices rising? Global supply chain and labor shortages can drive up construction prices, even if you’re not in an area impacted by a natural disaster. Adding extended replacement cost coverage can give you peace of mind that when building costs are spiraling, you’re not responsible for covering the difference between your policy limits and construction costs in the event of a total loss.
But you can also come up with your own estimates to get some peace of mind. To estimate the replacement cost of your home, multiply your total square footage by local per-square-footage building costs.
New-home construction costs average $100 to $200 per square foot, according to HomeAdvisor. If you have a 1,700-square-foot home, the cost of rebuilding could run anywhere from $170,000 to $340,000. Of course, those are based on national averages, so it’s a good idea to get localized building cost estimates from a real estate agent, insurance agent, or builders association in your community.
Once you know the replacement cost, you can multiply it by 1.10 to 1.50 (depending on the extended replacement cost you want) to determine your extended replacement cost coverage limit.
And keep in mind, you may need higher limits if you have granite countertops, custom cabinetry, hardwood flooring, marble tile, a solar roof, smart systems, eco-friendly materials, and other high-end finishes.
Other factors that can impact the replacement cost of your home include:
- The age of the home (older homes may have moldings and carvings that are expensive to re-create)
- The number of floors (two- or three-story homes are usually more expensive to rebuild than single-story homes)
- The number of rooms and bathrooms
- Exterior wall construction materials, such as siding, stucco, brick, stone, or veneer
- The type of roof and roofing materials used
- The age and type of heating, air conditioning, and ventilation systems
- Home improvements or renovations
- Other structures on the property, such as garages, sheds, and fences
- Special features such as fireplaces, arched windows, built-ins and other custom fixtures
WHAT IS HIGH-VALUE HOME INSURANCE AND WHO NEEDS IT?
Extended replacement cost vs. other coverage options
When you buy a home, other coverage options determine the actual value of the protection you receive and affect the price of the insurance policy. Let’s look at each of these options in detail:
- Market value — Market value is the price you could sell your home for on the open market. When you bought your home — assuming you purchased the property from an unrelated seller who wasn’t facing undue pressure to sell the home — you paid its market value. The market value of your home is usually higher than the replacement cost, since you wouldn’t have to repurchase the land to rebuild your home after a fire. You can determine the market value of your home by getting a professional appraisal or speaking to a real estate agent.
- Actual cash value — Actual cash value is a coverage option that pays the replacement cost minus any depreciation. If you have actual cash value coverage when a fire or another covered event destroys your home, the insurance adjuster will take into account the age and condition of the home’s walls, roof, flooring, lighting, and other components when deciding how much to pay out.
- Standard replacement cost — Standard replacement cost policies cover the cost of rebuilding a property with materials of the same quality. With replacement cost, depreciation isn’t a factor. It’s important to note that if you have an older home, you may not be able to insure it for the replacement cost value. Your replacement cost can change over time, so it’s a good idea to review your coverage limits each year, and let your insurance agent know if you improve or upgrade your home. These changes can increase your home’s estimated replacement cost.
- Guaranteed replacement cost — Some homeowners policies provide guaranteed replacement cost coverage, which pays the full cost of replacing the home, even if rebuilding exceeds policy limits.
The cost of adding extended replacement cost coverage to your homeowners insurance policy varies depending on your insurance carrier, coverage limits, and where you live. But purchasing this coverage for a home in a coastal community or an area with a high wildfire risk can cost more.
WHAT’S THE AVERAGE COST OF HOMEOWNERS INSURANCE?
How to buy extended replacement cost coverage
If you’re interested in adding extended replacement cost coverage to your homeowners policy, reach out to your insurance agent to get a quote. They may be able to add the endorsement to your policy right away, or at your next renewal date.
Most major insurance providers offer extended replacement cost coverage. If yours doesn’t, it might be worth shopping around for other policies.
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