Nerdy takeaways
- Guaranteed replacement cost insurance pays to rebuild your home as it was before the damage, even if the cost exceeds your dwelling limit.
- A few companies offer this coverage as an upgrade to your existing dwelling coverage.
- Guaranteed replacement cost coverage won’t pay for upgrades or for bringing your house up to code.
Imagine a tornado whips through your neighborhood and destroys dozens of houses, yours included. In the aftermath, construction prices soar. Now, it costs more to rebuild your home than your policy limits allow. With guaranteed replacement cost coverage, your policy would pay the full cost to rebuild your house to the way it was before the tornado.
What is guaranteed replacement cost coverage?
Guaranteed replacement cost coverage pays whatever it takes to rebuild your home after a covered loss, even if it’s more than your policy limits.
A standard policy covers your home on a replacement cost basis. The insurer will estimate how much it would cost to rebuild your house and set that as the policy’s dwelling coverage limit.
But costs can be higher than expected. After a major disaster, demand often surges for labor and building materials.
With guaranteed replacement cost coverage, cost doesn’t matter. The policy will pay the amount it takes to rebuild your home exactly as it was before.
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Answer a few questions to see custom quotes and find the right policy for you. How does guaranteed replacement cost insurance work?
Let’s look at how guaranteed replacement cost insurance works using a real-world example. Say you insure your home for its estimated replacement cost of $300,000.
- Your dwelling coverage limit: $300,000.
- Your deductible: $1,000. (A home insurance deductible is the amount of a claim you’re responsible for.)
- The disaster: A wildfire destroys your home along with many others in your area.
- The cost spike: This causes a labor shortage, and building costs go up by 30%.
- New cost to rebuild: Now, your home costs $390,000 to rebuild to its condition before the disaster.
Here’s how that situation would play out with and without guaranteed replacement cost insurance.
| Policy type | What the insurer pays | What you pay |
|---|---|---|
| Standard ($300,000 limit) | $300,000. | $90,000. |
| Guaranteed replacement cost | $389,000. | Your $1,000 deductible. |
How to get guaranteed replacement cost coverage
Because insurers take on unlimited liability for reconstruction costs, guaranteed replacement is usually the most expensive type of coverage for your home. It isn’t available in every state, and not every homeowner will qualify.
Here are some common requirements:
- Pass inspections. You’ll usually need to undergo home insurance inspections and replacement cost evaluations. Some insurers prefer newer homes, or older homes with documented upgrades.
- Insure to the recommended limit. You may need to insure your home for your carrier’s full recommended amount. And your insurer may automatically increase your coverage as needed.
- Report renovations. If you complete any major renovations, let your insurer know within 30 days.
Other levels of coverage
You generally have three levels of coverage to choose from: replacement cost, extended replacement cost and guaranteed replacement cost.
Extended replacement cost coverage offers a middle ground between the other two. It provides a buffer, usually 10% to 50%, above your dwelling coverage limit. So if rebuilding 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.
Here’s how the three compare when it comes to rebuilding your home after a covered disaster:
| Coverage level | What your insurance pays | What you pay |
|---|---|---|
| Replacement cost | Up to your policy limit. | Your deductible + everything over the limit. |
| Extended replacement cost | Your policy limit + a 10% to 50% buffer. | Your deductible + any costs that exceed your buffer. |
| Guaranteed replacement cost | The full cost to rebuild your home. | Your deductible. |
🤓 Nerdy Tip
If you have an older home you may need to rebuild 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’re 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. It could also be a good idea if you live in an area prone to natural disasters. In these areas, the cost to rebuild could surpass your home's insured value if demand for labor and materials increases.
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 as a standard part of many policies:
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