Your homeowners insurance is designed to cover the cost of rebuilding your home if it is damaged or destroyed. But sometimes, the cost to rebuild can be more than your homeowners insurance will cover; particularly if your home is destroyed due to a natural disaster that increases the costs of labor and materials. To help ensure your home rebuild will be covered by insurance, you can choose to add extended replacement cost to your policy.
Extended replacement costs adds anywhere from 25-50% to the coverage limit for rebuilding your home. When disaster strikes and you find yourself with a huge and expensive rebuild project, this extra coverage can help ensure your home is rebuilt to its former condition without you having to pay out of pocket.
How does extended replacement cost work?
When you take out a homeowners insurance policy, you’ll need to assign a percentage for replacement cost. Most insurers require you to opt for at least 80% replacement cost, though 100% is ideal. The replacement cost of your home will cover the costs to repair or rebuild your home to the exact same specifications. Replacement cost is based on how much it would cost to rebuild your home at current market values.
Extended replacement cost is something you can add so that your replacement cost exceeds 100%. You might wonder if it’s worth the extra cost (though extended replacement cost is generally an affordable addition to your homeowners insurance). But if your home is destroyed in a natural disaster that affects many homes in your region, the cost of materials and construction will likely become inflated, which means your 100% replacement cost may leave you short of rebuilding your home to its former state.
How are replacement cost estimates calculated?
Your insurance provider will analyze several factors about your home in order to determine replacement cost. These factors include the following.
- Square footage
- Age of the home
- Number of rooms
- Type of roof
- Number of floors
- Heating system
- Home improvements or renovations
If you’re not sure whether your insurance provider’s estimate is accurate, you can get your own independent estimate. You can do this either by yourself or with the help of a professional.
If you want to have your home’s replacement cost estimated by a professional, contact a local appraiser who is qualified to estimate replacement costs. You’ll arrange a time for them to come to your home and inspect it, inside and out, to figure out a good estimate for rebuild costs. They’ll note everything that would be required to rebuild your home so you can take it to your insurance company.
If you’d rather tackle it on your own, you have a couple of options. You can find a number of replacement cost calculators online with a quick search. These calculators will look at all the aforementioned factors to determine your home’s replacement cost. Alternatively, you can get a quick and basic estimate by multiplying your home’s square footage by the rebuild cost per square feet in your area.
What does extended replacement cost cover?
Extended replacement cost helps pay for the rebuild of your home if the loss is above 100% of your coverage limits. It can help pay for the construction of your new home after it’s been damaged or destroyed.
That means that if local prices become inflated after a weather disaster, you should still have enough coverage to rebuild your home. For example, your insurance company may estimate your home’s replacement cost at $300,000, which would be the coverage limit if you stick with 100% coverage.
But if you take out extended replacement cost coverage of 150%, your insurer will cover a rebuild of up to $450,000. If your home is destroyed by a major tornado along with other homes in your area, your cost to rebuild may go up to $400,000 due to an increase in labor and material costs, but your extended replacement cost coverage ensures that will be covered even though the rebuild is more expensive than your insurer’s original rebuild cost estimate.
How much does extended replacement coverage cost?
Extended replacement cost is an affordable add-on to your homeowners insurance. The cost depends on how much extended replacement cost you opt for. You can usually get extended replacement cost to cover 125-150% of your home’s rebuild costs, and it can cost around $25 to $50 annually on top of your regular premiums.
The best way to get a firm answer on how much extended replacement cost coverage will set you back is to ask your insurer for a quote. You can do this by calling them directly and explaining what you are looking for.
When do you need extended replacement cost?
Extended replacement cost is useful if you live in an area that’s prone to natural disasters such as hurricanes. That’s because when a disaster like that strikes, it takes out many homes in the area that then need to be rebuilt. The demand for materials and construction work increases, but the supply remains steady, which in turn pushes prices up. If you only have your home insured for an 80-100% replacement cost, you’ll likely end up with a deficit that you’ll have to cover out of pocket. But if you have taken out an extended replacement cost addition to your insurance, your entire rebuild is more likely to be covered.
Guaranteed replacement cost vs extended replacement cost
Extended replacement cost isn’t the only option to help ensure your home rebuild will be covered by your insurance. You can also look into guaranteed replacement cost to see if it makes more sense for you.
Guaranteed replacement cost will cover the rebuilding of your home no matter how much it costs. If you get this type of coverage, you don’t need to worry about fluctuating prices of lumber and labor because your insurance is guaranteed to cover the rebuild at 100% of cost.
Not all insurance providers offer guaranteed replacement cost, and it’s not available in all states. But it’s worth asking your insurance company whether it’s something they offer so you can weigh the pros and cons of both guaranteed and extended replacement cost to choose the one that’s right for you.
Is extended replacement cost right for you?
Most homeowners would benefit from adding extended replacement cost to their home insurance, but that’s especially true if you live in an area prone to natural disasters such as hurricanes, tornadoes, and flooding.
Adding extended replacement cost doesn’t cost that much annually, so it’s a smart decision to opt in so that your home can be rebuilt without any out-of-pocket costs to you if the market fluctuates due to a natural disaster requiring a lot of homes to be rebuilt in a short period of time.
Summary
Extended replacement cost is a home insurance add-on that increases the amount your insurer will cover to over 100% of your home’s replacement cost. It is generally affordable, which makes it a good addition for most homeowners, but especially those who live in areas prone to natural disasters. To learn more about how much it’ll cost you and whether it’s worth it, call your insurance provider directly to speak with an agent.
