What’s the Difference Between Standard, Extended, Guaranteed Replacement Cost?

Homebuyers are almost always focused on the fun parts, like choosing colors, textures and landscaping. The last thing homebuyers want to think about is the long list of unfortunate events – like a fire or a bad storm – that could take it all away.

A homeowners’ insurance policy usually includes property protection and liability protection. The property protection section comprises:

• Dwelling: This covers the house, attached structures, fixtures in the house, plumbing, heating, permanently installed air-conditioning systems and electrical wiring
• Other Structures: This covers detached structures such as storage sheds, garages, driveways, patios, sidewalks, retaining walls etc.
• Personal Property: This covers the contents of the house and other personal items owned by the occupants on an actual cash value basis or on a replacement cost basis
• Loss of Use: This covers living expenses beyond the normal living expenses in case the policyholder cannot live in the house while it undergoes repair or reconstruction

Home ownership comes with responsibilities, and an important one is choosing Homeowners’ Insurance. If your home is seriously damaged or destroyed, how much protection will you need to rebuild?

This is where replacement cost insurance comes in.

• Standard Replacement Cost coverage reimburses 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.

Some policyholders often include endorsements such as guaranteed replacement cost coverage or extended replacement cost coverage in their policies.

• Extended Replacement Cost covers an additional 25% to 50% of the replacement value of the home over the dwelling coverage limit.
• Guaranteed Replacement Cost pays for the cost to rebuild your home exactly as it was before the damage, even if the cost exceeds the estimated value of the home. There is no cap on what it takes to get your home back to its original form.

For instance, when the Camp fire in Paradise burned down so many structures and the entire town tried to rebuild, the cost of labor and materials costs soared. Owners discovered that the cost of building permits add up quickly. Paradise homeowners with standard replacement coverage had to pay sums out of pocket, while those with extended or guaranteed replacement cost policies could plan on covering the additional expenses.

By paying a higher benefit above the policy limit, extended or guaranteed replacement cost policies protect policyholders from higher reconstruction costs after a major disaster.

Simply stated, here’s the difference:

• Standard Replacement Cost covers rebuilding up to your policy limit
• Extended Replacement Cost covers rebuilding up to a certain percentage over your limit
• Guaranteed Replacement Cost takes it a step further

“Guaranteed” is the keyword here. You’ll be covered for the cost it takes to rebuild your home to its previous condition, regardless of price or your home’s value. Not all insurers offer this coverage. Plus, it’s slightly more expensive than the other options. But if you live in a disaster-prone area, it may be your best choice. When you compare the small premium 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.

How can you decide if standard replacement cost coverage is enough? How do you know if you need to pay for extended or guaranteed coverage? As a professional insurance agent, I can help. Please feel free to contact me at lgarcia@vanbeurden.com. Let’s work together to find the policy that best suits your needs.