Replacement Cost doesn’t automatically mean you have enough insurance
There are only a few things in the world of insurance as bad as paying premiums for years on end only to find out that you don’t have the right coverage once you finally have a claim. This is especially true on homeowners insurance, where it’s easy to assume you’ll receive the full check to rebuild your home if you have a total loss. Unfortunately, it’s all too common for your home to be underinsured.
Replacement Cost Valuation
Homeowner’s insurance policies don’t automatically offer you replacement cost coverages on your home. There are actual cash value options and functional replacement cost options within your homeowner’s insurance policy.
Most standard homeowner’s insurance policies will include the replacement cost option, but sometimes this also isn’t quite as clear cut as it seems. The reason? Standard homeowner’s insurance policies won’t pay more than the coverage limit that you have on your policy, even if that amount truly isn’t high enough to fully replace your home.
For example, let’s say your home insurance policy says $350,000 of coverage on your home. You have a total loss and the final bill to rebuild your home exactly the way it was comes out to be $450,000. Your insurance policy won’t pay $450k, it will pay $350k, leaving you with a bill for $100,000 to rebuild a house that you thought you had enough insurance for.
How do you know if you have enough insurance coverage to fully rebuild your home? The short answer is that there’s always going to be some type of doubt simply because it’s not a hard fixed cost. There are a few things you can do to ensure your home will be fully covered.
Replacement Cost Estimator
Your insurance agent or company will use a software system that estimates how much it would cost to rebuild your house. This replacement cost estimator uses things like the construction style of your home, square footage, number of bedrooms, etc. when determining how much it would cost to rebuild your home.
If you’re worried about your home being underinsured, you can talk to your local agent about the exact quality and features of your home. They can do an updated replacement cost estimate, which could result in a reason to increase your coverages if your current limit is too low.
Expanded replacement cost endorsement
As long as your home is insured for 100% of the estimated replacement cost, you may also be able to add the expanded or enhanced replacement cost coverage to your homeowners policy.
This basically says that if you have a total loss and your rebuilding costs end up being more than what your coverage limit is (i.e. it actually cost $350,000 to rebuild your home but you only have coverage at $300,000), then you’ll receive an extra 20% to 25% of your coverage limit to cover that. If you had $300,000 of coverage on your home insurance policy, then you’d essentially have up to $375,000 to rebuild your home.
There also is an additional coverage that you can add called, guaranteed replacement cost. With this additional coverage added the insurance company will pay the full cost to rebuild your home, no matter what the final bill is. This option gives you the best peace of mind but is also not available on every home insurance policy.
Key Takeaway
If you have a total loss on your home, you’re probably expecting that the insurance company will pay the full cost of what it will take to rebuild. Unfortunately, most home insurance policies will only pay up to the limit of what’s shown on the declaration’s page, which may not be high enough to rebuild your home. Understanding how replacement cost actually works – and ensuring you have high enough limits – could be critical in having enough money to rebuild your home.
Reach out to us to find out of your home is fully insured in the event of a total loss.
