One of the biggest factors in homeowners being under insured is the fact that they’ve heard that “Replacement Cost” is included in their policy.
Well, what does that really mean? Does it mean that no matter what your home will be “replaced”? What about if the price to replace your cost goes over the amount of insurance you have?
Let’s dig in to what Replacement Cost, in many cases, actually means. There are three types that we hear and encounter most often:
- Replacement cost* – The insurance company will replace the property up to the limits on your policy without deduction for depreciation. This typically means that if you have a property insured for $300,000, then the policy can pay up to a maximum of $300,000 to replace a property with similar construction.
- Extended Replacement Cost*- This is a better version of the above and is typically indicated with a percentage. For example, if a property is insured for $300,000 with 25% extended replacement cost, the insurance will usually pay out $300,000 in a total loss and if necessary they will pay out the additional 25% which in this case is an additional $75,000. So in total, this hypothetical policy has the capability of paying out $375,000 in the event of a total loss.
- Guaranteed Replacement Cost* – This is the best coverage you can receive and many insurance carriers do not offer it unless there are special circumstances. Guaranteed replacement cost can go above the total amount the property is insured for and pay out any amount to replace the property. These types of policies are not as common as many people believe.
Now the problem is that the term “guaranteed” is used loosely in conversation whenever speaking of replacement cost. This is an error and in most cases is not the actual coverage provided on the policy which is why many people may think they have enough insurance coverage when in fact, they don’t.
Very few insurance policies insure with “Guaranteed Replacement Cost” as most insurance companies want the dwelling to be insured for the correct calculated value so that they can charge an appropriate premium.
For example, it wouldn’t make a lot of sense to insure a $1 million dollar home for $250,000 just to get a cheaper premium and then still hold an insurance company responsible to replace the full $1 million.
Insurance agencies have access to programs that calculate the replacement cost of your home by taking into account the price of material and labor in your area, the size of the home, whether or not your home has upgraded features and other detailed factors.
While, the replacement cost calculators are very accurate, we always encourage the homeowner to insure the property at the amount they feel most comfortable as many insurance policies state that the homeowner is the true expert on the value of their property.
Once you and your agent have agreed on a total amount to insure the home, make sure to find out what kind of “Replacement Cost” you have available to you and choose accordingly to make sure your property is covered the way you need!
*These are general overviews and may not be pertinent to the actual insurance policy you have in place. Please always read your policy documentation COMPLETELY so that you understand what your policy’s capability is when paying out a claim or paying out a claim for a total devastation.