Homeowners Insurance: Is Your Replacement Cost Coverage Guaranteed?
Homeowners Insurance: Is Your Replacement Cost Coverage Guaranteed?
Most homeowners know they need insurance to shield themselves financially against major damages. But choosing the right level of homeowners coverage can be complicated and not understanding the options could cost you dearly if your policy doesn’t fully cover your losses.
A common source of confusion is the limitations of replacement cost coverage. If your home is damaged or destroyed, this type of policy reimburses you for a pre-determined cost to rebuild your property. While it’s a step up from actual cash value coverage, which deducts depreciation from your reimbursement, a replacement cost policy doesn’t guarantee you’ll pay nothing out of pocket.
Why replacement cost may not be enough
When you buy a replacement cost policy, your insurer performs an assessment of your home and assigns a dollar limit to the coverage. For example, if they estimate it would cost $1 million to rebuild your house from the ground up, that’s the amount you would receive if your home was completely destroyed. The trouble is that costs fluctuate over time. The price of labor and materials could rise considerably between the time you buy the policy and the time your loss occurs. In fact, from May 2021 to May 2022, prices for building materials rose 36%, according to the U.S. Bureau of Labor Statistics. Such rapid inflation could mean the true cost to rebuild your home would far exceed your $1 million policy limit, leaving you on the hook for hundreds of thousands of dollars.
How to bulletproof your coverage
The good news is there are insurance options that offer even greater protection than replacement cost coverage. Select carriers may offer these two alternatives:
- Extended replacement cost: For an extra charge, you can add an endorsement to your policy that covers additional replacement costs up to a certain percentage of the original estimate (usually 25-50%).
- Guaranteed replacement cost: Typically offered only for homes valued at $1 million or more, this option will cover the entire cost to rebuild, regardless of how much it might exceed the insurer’s original assessment.
As you might expect, guaranteed replacement cost coverage is the most expensive option. But for owners of high-end homes, the higher premium can help achieve complete peace of mind. Guaranteed coverage may also be especially worthwhile for homes in disaster-prone areas, such as those susceptible to hurricanes, tornadoes or wildfires.
Not sure which coverage level is right for you? Contact Chelsea James at 817.420.5742 or CJames@frostinsurance.com to assess your risks and connect you with the right insurance partners to meet your needs.
Investment management services, financial planning and trust services are offered through Frost Wealth Advisors of Frost Bank.
Investment and insurance products are not FDIC insured, are not bank guaranteed, and may lose value. Brokerage services offered through Frost Brokerage Services, Inc., Member FINRA/SIPC, and investment advisory services offered through Frost Investment Services, LLC, a registered investment adviser. Both companies are subsidiaries of Frost Bank. Additionally, insurance products are offered through Frost Insurance. Deposit and loan products are offered through Frost Bank, Member FDIC.