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Replacement cost homeowners insurance

How you can benefit from choosing replacement cost insurance over actual cash value

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When you’re buying homeowners insurance, it’s vital to get enough coverage to fully rebuild or replace what you lose. Determining how much you need and whether to go with the standard of replacement cost insurance or actual cash value is one of the main starting points for getting the right amount to protect your home and belongings.

What is replacement cost insurance?

When you choose replacement cost insurance an insurer pays what it costs to replace or rebuild at the time of loss, rather than what you paid for it when you initially made the purchase. You’ll generally find this is the default valuation method for homeowners insurance.

Extended and guaranteed replacement cost

Extended replacement cost (ERC) and guaranteed replacement cost (GRC) are extras that some insurers provide policyholders. Both provide additional coverage past the limit set by the policy, but ERC only does so up to a certain percent of the original limit.

That means if it costs $450,000 to rebuild and you’re only insured for $300,000, you may still be covered for the full amount if your policy includes an ERC or GRC provision. The amount above the limit that’s covered will depend on the specific policy, and is something to be discussed when you’re comparing policies.

Are all of my possessions covered?

Choosing replacement cost insurance doesn’t mean your most valuable items are automatically covered to their full value. As with any type of insurance, homeowners insurance has limits on how much will be paid for an individual item and on the whole.

You may want to look into riders for particularly expensive watch or collectors items. Similarly, if you have a historic home you may want to look into specialized insurance if you would want to rebuild with original materials.

Replacement cost insurance vs actual cash value

Actual cash value (ACV) is another type of valuation that’s used by insurance providers. Rather than paying how much it would cost to replace the item at the time of loss, it provides what the name implies — the actual cash value.

Replacement cost insuranceActual cash value
Covers the cost of replacement at the time of lossCovers the value of the item or structure at the time of loss
Default valuation for many homeowners insurance policiesMay be necessary for high-value items that appreciate over time
Best protection against underinsuranceHigher risk of underinsurance

How to calculate the replacement cost of your home

The value of a home and the cost to rebuild it to its previous condition are two very different things, and many people simply don’t have enough knowledge to be able to say with any certainty how much coverage is needed.

Aside from the value of your possessions, here’s what to consider when calculating the replacement cost of your home:

  • Size. The square footage of your home is one of the easiest ways to get a base dollar value. It won’t cover everything, but it’ll give you a starting point.
  • Construction. Style of house, roofing materials, the number of rooms and interior construction can all impact the replacement cost.
  • Upgrades. Make sure to factor in any upgrades you’ve made. New appliances, solar panels and features like an in-ground pool will up the cost to rebuild.
  • Code changes. Rebuilding to code may be more expensive than doing a one-for-one replacement of what was there, so make sure you factor in any big structural changes that may need to be made.
  • Historic value. Old or rare materials and specialized construction can cost much more than a standard modern build.

Using online calculators

To help you work out how much coverage is enough for your home, many insurers offer handy online calculators. However, rather than taking the figures quoted by these calculators at face value, try to look for a calculator that takes into account current building and replacement costs to help you reach a more accurate sum insured.

How much is it to get replacement cost insurance?

Because it often offers a higher level of protection, replacement cost insurance tends to cost more than actual cash value. However, that doesn’t mean it costs more across the board, or that it isn’t worth the extra expense. Coverage for $400,000 vs $300,000 may be hundreds of dollars more a year.

Being stuck without the necessary coverage to fully recoup in the event of an unexpected loss can end up being more costly than the difference in premium prices.

Is replacement cost insurance right for me?

It depends on your individual situation, and in some cases having part of your homeowners insurance be replacement cost insurance and another part be ACV may be the right move. It depends on your home, belongings and additional insurance you may already have.

Working with an independent insurance agent can help you figure out the best next steps when it comes to getting a policy. A good agent works with your best interests in mind and will help you seek out the type of policy that fits your family’s needs — including the best type of valuation.

Compare homeowners insurance with replacement cost

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Bottom line

Regardless of whether you choose replacement cost insurance, it’s essential that you shop around. By comparing the features and cost of a range of policies, you’ll find the best value for money.

Frequently asked questions about replacement cost insurance

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