With guaranteed replacement cost, you don’t have to worry about gaps in coverage that could leave you financially vulnerable after a disaster.
Published Mar 20, 2024 8:45 a.m. PDT · 2 min read Written by Cassidy Horton Cassidy Horton
Writer | Insurance, Banking, Personal Finance
Cassidy Horton is a freelance writer covering pet and home insurance. She holds an MBA and a bachelor's in public relations from Georgia Southern University, and she's worked with top finance brands like Forbes Advisor and Consumer Affairs. Cassidy first became interested in personal finance after paying off $18,000 in debt within 10 months of graduating college. She later went on to triple her salary in two years by ditching her 8-to-5 job to write for a living. Today, Cassidy is the founder of Money Hungry Freelancers, a platform dedicated to helping other freelancers build a strong financial foundation. In her spare time, she enjoys hiking around the Pacific Northwest and hunting down the best fried chicken in town. She is based in Seattle, Washington.
Assistant Assigning Editor Caitlin Constantine
Assistant Assigning Editor | Home insurance, renters insurance, pet insurance
Caitlin Constantine is an assigning editor at NerdWallet, focusing on homeowners, renters and pet insurance. She has more than 15 years of experience in digital media, including as the deputy managing editor at The Penny Hoarder and as a digital producer for a 24/7 news station based in the Tampa Bay area. Caitlin enjoys exploring the ways technology can help people become better informed about the world. She currently lives outside Asheville, North Carolina.
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Nerdy takeawaysImagine a tornado whips through your neighborhood and destroys several houses, yours included. In the aftermath, construction prices soar, which means it will cost more to rebuild your home than your policy limits allow. With guaranteed replacement cost, your policy would pay the entire amount required to rebuild your house to the way it was before the tornado.
Guaranteed replacement cost coverage covers the full cost of rebuilding your home after a covered loss, even if reconstruction costs exceed your policy limits.
With a standard policy, which covers your home on a replacement cost basis, your insurer will only pay up to the amount listed on your policy. But costs can climb much higher than expected after a major disaster if demand surges for labor and building materials.
With guaranteed replacement cost coverage, your insurance company commits to paying whatever it takes to rebuild your home exactly as it was before, no matter what it costs.
Get home insurance quotes in minutes Answer a few questions to see custom quotes and find the right policy for you. Get StartedWhen you take out a home insurance policy, you typically insure your house for the estimated replacement cost. For example, your dwelling coverage limit may be set at $300,000 if that’s what it would cost to rebuild your house. Then, if your home is damaged by a windstorm, fire or other covered disaster, your insurance company would pay up to this limit to repair or rebuild it, but no more.
But what happens if there’s a labor shortage or building costs spike and it ends up costing more than $300,000 to rebuild? With guaranteed replacement cost, your insurance company would pay the full price to rebuild your home to its identical condition before the disaster, no matter what it costs. This means that if it costs $400,000 to rebuild your home but your dwelling limit is capped at $300,000, your insurance will cover the remaining $100,000. You only pay the deductible , which is the set amount you’re responsible for paying out of pocket on a claim.
Guaranteed replacement is typically the most expensive type of coverage option available for your home. Insurers charge more because they’re taking on unlimited liability for reconstruction costs above your policy limits. This additional risk gets passed on to you through higher premiums.
Guaranteed replacement cost is the most comprehensive form of coverage you can get for your home, but it’s also the most expensive option and isn’t offered by many insurance companies. So what other levels of coverage do you have to choose from? Let’s go through your options.
Replacement cost coverage is usually the default option for your home and other permanent structures on the property like a garage or fence. This pays to rebuild or repair the structures to their pre-loss condition, up to the limits listed on your policy. However, if reconstruction costs exceed your policy maximums, you may be on the hook for extra costs.
Extended replacement cost coverage provides a buffer, usually 10% to 25% but sometimes as high as 50%, above your dwelling coverage limit. So if rebuild costs go slightly over, you're covered. But the buffer may not be enough in a widespread disaster with severe shortages of labor and materials.
If you have an older home that may need to be built to new codes following a disaster, consider getting ordinance or law coverage . Guaranteed replacement cost doesn’t pay for expenses related to upgrades, even if they are mandatory.
Guaranteed replacement cost insurance could make sense if you want assurance that your home will be fully rebuilt after a disaster, regardless of the cost. It could also be a good idea if you live in areas prone to natural disasters where the cost to rebuild could surpass your home's insured value if demand for labor and materials increases.
That said, you may not need guaranteed replacement cost insurance if your dwelling coverage has kept up with inflation and building costs in your area.
Guaranteed replacement insurance is harder to find than extended replacement cost insurance. However, these insurance companies offer it a standard part for many policies:
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Cassidy Horton is a freelance writer who specializes in pet and home insurance for NerdWallet. She holds an MBA and has written more than 1,000 articles about personal finance. See full bio.
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