A homeowners policy can provide peace of mind because you know your home and belongings are covered if a disaster strikes, but not all policies provide the maximum protection you might need, especially for your valuable personal property.
Most standard policies only pay a percentage of what it would cost to replace the things you rely on every day. That’s where replacement cost coverage saves the day. With a replacement cost coverage policy, you won’t have to worry about draining your savings when you face a major loss.
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What is home insurance replacement cost coverage?
When you file a home insurance claim for a covered loss, the insurer will pay the settlement by applying actual cash value or replacement cost value to losses. Typically, standard policies provide replacement cost coverage for the home’s structure but actual cash value coverage for your belongings.
Actual cash value coverage pays a depreciated value of your belongings. For example, if you purchased a new TV for $2,000 three years ago and it’s destroyed in a fire today, the provider will pay you it’s depreciated value. If the insurer determines that the TV has depreciated by 50 percent, you’ll receive a settlement payment of $1,000, minus your deductible.
On the other hand, replacement cost coverage pays the amount you’ll need to replace your property at current market prices. That means you can receive full payment for your TV, minus your deductible, even if the current price is more than $2,000.
Usually, actual cash value policies pay settlements faster than replacement cost policies. With an actual cash value policy, the insurance adjuster can estimate the value of your losses and issue a settlement payment. If you have a replacement cost policy, you’ll need to replace your losses out of pocket, then submit your receipts with the claim for reimbursement.
When you purchase a homeowners policy, the insurer will determine how much it will cost to completely rebuild your home – its replacement cost. Any time you make a home improvement that increases your house’s value, notify your insurer because you’ll likely need to increase your coverage to adjust the replacement cost. For instance, if you add an addition to your home that costs $25,000, you’ll need to increase your dwelling coverage by the same amount.
In some cases, the replacement cost feature of dwelling coverage might not provide enough protection. If a covered loss destroys part of an older home, the contractor may need to replace outdated systems that don’t meet current building codes. However, a policyholder can add an ordinance of law rider to the policy to cover the extra expenses associated with rebuilding the home to code.
How do I know if I have replacement cost coverage?
When shopping for home insurance, always ask the insurance agent if a policy will include actual cash value personal property coverage or replacement cost coverage. If you already have a policy but don’t know what type of coverage you have, you can find the answer by looking in the “Conditions” section of your policy’s terms. The conditions section spells out lots of details about your coverage, including your deductible, how to file a claim and how the insurer will pay claims.
Who is replacement cost coverage for?
It’s not difficult to see the advantage of purchasing a replacement cost policy. Even minor disasters can cause a few thousand dollars in damages. Perhaps a tree falls through your bedroom and the ensuing deluge of rain ruins your bedroom furniture. If your insurer pays you a depreciated value for your losses, you can probably afford to pay the extra cost out of pocket to buy a new bedroom set.
But major catastrophes can cause losses that most people can’t afford. If your home burns to the ground, you’ll need tens of thousands of dollars to replace your appliances, clothing and home furnishings. The limited amount of coverage provided by an actual cash value would be a drop in the bucket compared to the cost of restoring your home to its previous livable standard.
Insurance companies set limits on how much they will pay for certain types of personal belongings. For example, State Farm’s default limit for home office property is $1,500. Although State Farm allows you to increase that limit, it might not provide enough coverage to replace fine furniture, books and computer equipment.
A replacement cost policy could eliminate the need to purchase riders for expensive but replaceable personal items. While it might seem like replacement cost coverage is a good idea for people who enjoy the finer things in life, it can actually benefit most homeowners.
What is extended or guaranteed replacement cost coverage?
Many premium homeowners policies provide extended or guaranteed replacement cost coverage, which provides added protection for rebuilding your home’s structure.
Extended replacement cost coverage pays to rebuild your home up to the dwelling coverage limit, but it also provides a specified amount of extra coverage in case rebuilding costs exceed the dwelling limit. The extra coverage is calculated as a percentage of your dwelling coverage, usually 25 to 50 percent.
For example, if you have $200,000 in dwelling coverage, with an extended replacement cost cap of 50 percent, you’ll have up to $300,000 to rebuild your home. Some insurers, including Chubb, include extended replacement cost and personal property replacement cost coverages in their standard policies.
Guaranteed replacement cost coverage provides the best dwelling protection for your home because it doesn’t cap rebuilding costs. That means your policy will cover all rebuilding expenses, minus your deductible, regardless of your dwelling coverage limit. Some providers offer guaranteed replacement cost riders, which you can add to your standard policy for an additional cost.
Does having replacement cost coverage make my home insurance more expensive?
Some insurers, including USAA, offer personal property replacement cost coverage in standard homeowners policies. However, most carriers offer the coverage as a rider or endorsement. The cost of adding a replacement cost coverage rider or endorsement varies by company and can depend on the amount of personal property coverage you need.
We requested two quotes from Hippo Insurance for a home in Nashville, Tennessee, and here’s what we received.
- Dwelling coverage: $260,000
- Liability coverage; $100,000
- Actual cash value personal property coverage: $104,000
- Annual premium: $1,320
- Dwelling coverage: $260,000
- Liability coverage; $200,000
- Replacement cost personal property coverage: $182,000
- Annual premium: $1,656
As you can see, we were able to nearly double our personal property coverage and add replacement cost coverage for a little more than $300 per year. With the peace of mind replacement cost coverage offers, we’d say its worth the extra cost.
Before purchasing a homeowners policy, know exactly what type of coverage you’re getting. Most standard home policies only include actual cash value for your personal property. That means you’ll likely pay a potentially hefty sum out of pocket when disaster strikes. However, most major insurers offer optional replacement cost coverage, which you can add to your standard home insurance policy. Replacement cost coverage is affordable and worth the price when you need it.
Most standard homeowners policies include replacement cost coverage for your house’s structure. However, standard coverage might not pay all rebuilding costs, especially if you own an older home that’s not built to standard codes.
Policies that offer extended replacement cost coverage provide extra coverage to rebuild your home, usually 25 to 50 percent of your dwelling coverage. Guaranteed replacement cost coverage provides the best protection because it pays to completely restore your home without limits.