What Is Guaranteed Replacement Cost Coverage?
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Guaranteed replacement cost insurance pays to rebuild your home as it was before it was damaged, even if the cost exceeds your dwelling limit.
A few companies offer guaranteed replacement coverage as an upgrade to your existing dwelling coverage.
Guaranteed replacement cost won’t pay for upgrades or for bringing your house up to code.
Imagine a tornado whips through your neighborhood and destroys several houses, yours included. In the aftermath, construction prices soar, which means it will cost more to rebuild your home than your policy limits allow. With guaranteed replacement cost, your policy would pay the entire amount required to rebuild your house to the way it was before the tornado.
What is guaranteed replacement cost?
Guaranteed replacement cost coverage covers the full cost of rebuilding your home after a covered loss, even if reconstruction costs exceed your policy limits.
With a standard policy, which covers your home on a replacement cost basis, your insurer will only pay up to the amount listed on your policy. But costs can climb much higher than expected after a major disaster if demand surges for labor and building materials.
With guaranteed replacement cost coverage, your insurance company commits to paying whatever it takes to rebuild your home exactly as it was before, no matter what it costs.
How does guaranteed replacement cost insurance work?
When you take out a home insurance policy, you typically insure your house for the estimated replacement cost. For example, your dwelling coverage limit may be set at $300,000 if that’s what it would cost to rebuild your house. Then, if your home is damaged by a windstorm, fire or other covered disaster, your insurance company would pay up to this limit to repair or rebuild it, but no more.
But what happens if there’s a labor shortage or building costs spike and it ends up costing more than $300,000 to rebuild? With guaranteed replacement cost, your insurance company would pay the full price to rebuild your home to its identical condition before the disaster, no matter what it costs. This means that if it costs $400,000 to rebuild your home but your dwelling limit is capped at $300,000, your insurance will cover the remaining $100,000. You only pay the deductible, which is the set amount you’re responsible for paying out of pocket on a claim.
Guaranteed replacement is typically the most expensive type of coverage option available for your home. Insurers charge more because they’re taking on unlimited liability for reconstruction costs above your policy limits. This additional risk gets passed on to you through higher premiums.
Other levels of coverage
Guaranteed replacement cost is the most comprehensive form of coverage you can get for your home, but it’s also the most expensive option and isn’t offered by many insurance companies. So what other levels of coverage do you have to choose from? Let’s go through your options.
Replacement cost
Replacement cost coverage is usually the default option for your home and other permanent structures on the property like a garage or fence. This pays to rebuild or repair the structures to their pre-loss condition, up to the limits listed on your policy. However, if reconstruction costs exceed your policy maximums, you may be on the hook for extra costs.
Extended replacement cost
Extended replacement cost provides a buffer, usually 10% to 25% but sometimes as high as 50%, above your dwelling coverage limit. So if rebuild costs go slightly over, you're covered. But the buffer may not be enough in a widespread disaster with severe shortages of labor and materials.
If you have an older home that may need to be built to new codes following a disaster, consider getting ordinance or law coverage. Guaranteed replacement cost doesn’t pay for expenses related to upgrades, even if they are mandatory.
Who should consider guaranteed replacement cost coverage?
Guaranteed replacement cost insurance could make sense if you want assurance that your home will be fully rebuilt after a disaster, regardless of the cost. It could also be a good idea if you live in areas prone to natural disasters where the cost to rebuild could surpass your home's insured value if demand for labor and materials increases.
That said, you may not need guaranteed replacement cost insurance if your dwelling coverage has kept up with inflation and building costs in your area.
Insurance companies that offer guaranteed replacement cost
Guaranteed replacement insurance is harder to find than extended replacement cost insurance. However, these insurance companies offer it a standard part for many policies:
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