When you have home insurance with replacement cost coverage, your insurer will cover the full cost to repair or replace your property, less your deductible, if it’s damaged or destroyed by a covered issue, up to your policy limits. That’s in contrast to actual cash value coverage, which limits claim payouts to the depreciated value of the damaged property.
Depending on your policy selections and endorsements, replacement cost coverage can be part of your dwelling coverage (your home’s structure), personal property coverage, or both.
How does replacement cost coverage work?
When you file a claim and have replacement cost coverage, your insurer will assess the damage. If your claim is approved, the insurer will issue a claim payout that reflects the current cost of repairing or replacing the damaged property.
Without replacement cost coverage, your insurer may determine your claim payout based on the actual cash value, which takes depreciation into account. As such, your claim payout will likely be lower than the cost of restoring, rebuilding, or replacing the affected property.
Exactly how replacement cost coverage works will depend on the type of property covered:
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Dwelling coverage (your home’s structure). Many home insurance policies offer replacement cost coverage for damage to the structure of your home. In this case, your insurer will base the claim payout on the current cost of labor and materials.
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Personal property coverage (the contents of your home). If you have replacement cost coverage for your personal property, your insurer will issue a claim payout based on the current market value of the item.
Tip: Most standard homeowners insurance policies default to actual cash value for your personal property coverage. If you want replacement cost coverage for your personal property, you’ll likely have to add an endorsement to the policy at an additional cost.
When you submit a claim with replacement cost coverage and it gets approved, your insurer will likely send you two payments. The first payment will be for the actual cash value of the damaged property.
Once the repairs or replacements are underway or completed, your insurer will issue a payment for the remaining amount, which is known as recoverable depreciation. Note that you may need to submit receipts or other documents to prove that you completed the repairs or replacements.
Keep in mind that replacement cost coverage does not cover the cost of upgrading or improving your property. Therefore, if a fire destroys your kitchen and you wish to remodel it during the rebuild, replacement cost coverage will not cover the additional expense. Likewise, if a covered peril destroys your furniture and you want to upgrade from a basic couch to a luxury sofa, you’ll have to cover the difference out of pocket.
Learn more: Replacement cost coverage vs. actual cash value coverage
How much replacement cost coverage do I need?
Every insurance policy has a coverage limit, which is the maximum amount your insurer will pay to settle a single claim. The amount of coverage you need depends on several factors, including the value of your home and assets, as well as the risks specific to your property and location.
If you choose replacement cost coverage, consider the following:
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Dwelling coverage. You should insure your home for 100% of its replacement cost. You don’t want to risk catastrophic losses if your home is severely damaged or destroyed.
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Personal property. Many policyholders choose to cover personal property for up to 50% of their dwelling coverage. However, policies often default to actual cash value. You can increase your coverage limit or opt for replacement cost coverage to provide greater financial protection against losses.
How much would it cost to replace your home? Replacement cost coverage estimator
How much does replacement cost coverage cost?
The price of replacement cost coverage depends on many factors, including:
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Home replacement cost. The cost of rebuilding your home has a direct impact on your policy rates. The more it would cost to rebuild your home if a covered peril were to destroy it, the more you will pay for insurance.
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Personal property coverage. The amount of coverage you choose for your personal property and whether or not you opt for replacement cost coverage will affect your premiums.
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Age of your home. Policies for newer homes tend to be cheaper, while insuring older homes can be more expensive. That’s because aging and outdated systems present a greater risk.
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Your insurer. Rates and coverage vary by insurer, so how much you pay for replacement cost coverage will depend on the insurer and policy you choose.
The best way to determine how much you’ll pay for replacement cost coverage is to contact your insurer. If you’re shopping for coverage, get multiple home insurance quotes to determine the average cost for your property.
Is replacement cost coverage worth it?
Replacement cost coverage is often worth it, especially for your dwelling. When your policy has replacement cost coverage, your claim payout will reflect the current market value of materials and labor. That cost can be substantially higher than what you’d otherwise receive for a policy with actual cash value coverage.
Whether you need replacement cost coverage for your personal property depends on your budget, desired level of financial protection, and the value of your items. A policy with actual cash value coverage for personal property may be cheaper, but you’ll likely end up paying more out of pocket after a claim.
That may not be problematic if you suffer a minor loss. Still, if you have a significant number of high-value items in your home, replacement cost coverage will provide a higher level of financial protection.
Guaranteed replacement coverage vs. Extended replacement
Replacement cost coverage and actual cash value aren’t the only methods an insurer may use to determine your claim payout. In some cases, you may be able to enhance your policy with extended replacement cost coverage or guaranteed replacement cost coverage.
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Extended replacement cost coverage is an endorsement that increases the amount of your dwelling coverage by a specified percentage, typically ranging from 25% to 100% or more above your standard coverage limit. It will kick in if the cost of repairs exceeds your policy's coverage limit.
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Guaranteed replacement cost coverage is an endorsement under which your insurer will pay the total amount it costs to completely rebuild your home if a covered peril destroys it, regardless of the coverage limit on your policy. This option is generally more expensive than extended replacement cost coverage, and not all insurers offer it.