You hope your home insurance policy will help you rebuild your home if it ever breaks down, to replace your personal belongings: your favorite set of rocking chairs, your appliances and all your smart home devices. But not all coverage is created equal, and how much you get to rebuild depends a lot on the type of coverage you have: either replacement cost insurance or actual cash value insurance.
To make sure you have the coverage you need, let’s talk about what replacement cost insurance is and how much coverage it provides, as well as ways to extend your coverage.
what is replacement cost insurance?
Fortunately, most homeowners insurance policies include replacement cost insurance. This comprehensive type of coverage within your policy pays you to repair or replace your home and belongings if they are damaged by a covered peril on your policy (things like lightning, fire, theft, falling objects, etc.). As long as replacement costs stay within your policy limits, you don’t have to pay anything out of pocket.
Less commonly, some insurance companies offer actual cash value insurance instead. This lower-cost policy provides less coverage and may require you to pay quite a bit out of pocket to replace your home and belongings. (Be sure to take a look at your insurance declaration page to determine what type of coverage you have.)
- Replacement cost insurance pays you to repair or rebuild your home as it was before a catastrophic event. It’s also worth replacing your damaged, destroyed, or stolen personal belongings with new items of similar quality.
- Actual cash value insurance pays you the depreciated value of your personal belongings, which is less than what you bought them for and probably not enough to completely replace them.
- Extended replacement coverage typically gives you 10% to 50% more coverage to rebuild your home after a catastrophic event.
- Guaranteed replacement coverage pays to rebuild your home and replace your belongings, no matter how much it all costs.
replacement cost insurance vs. actual cash value insurance
Actual Cash Value (ACV) insurance pays you the amount your property is worth when it is damaged or destroyed. Since most personal belongings depreciate, meaning they become less valuable over time, you would expect to receive a lower payment with ACV than with replacement cost coverage.
Many insurance companies require that you have enough homeowners coverage to completely replace your home and the structures you own. As for your belongings, it’s usually up to you whether you want replacement cost coverage or ACV coverage.
When determining how much coverage you need, keep in mind that replacement cost coverage costs more than ACV. however, it can be instrumental in helping you rebuild your home and replace your belongings without spending too much on your savings.
How does replacement cost insurance work?
Let’s say a falling object damages the wooden front door. If you have replacement cost insurance, you would expect your insurance company to write you a check to replace the door with one of similar quality, not a fiberglass or steel door, for example.
You should take video of any damage to your home to quickly and easily file claims with your insurance company. Similarly, you must provide your insurance company with a list of the damaged items, when you bought them, how much, photos you have, and original receipts if you have them. (For a convenient way to keep track of your items and how much they’re worth, check out our emergency preparedness item tracker.)
Your insurance company likely follows a two-step payment process. First, you will receive the ACV of your items in advance. You will then receive the rest of your payment (the difference between the replacement cost and the ACV) after you replace your items or rebuild your home. (Some policies allow you to receive the full replacement value of your home without replacing anything, but these are more expensive.)
Replacement cost insurance aims to replace your belongings with new ones of similar quality. so it’s important to note that there might be some wiggle room to negotiate with your insurance company if there isn’t an exact replacement for your items.
limitations of replacement cost insurance
Replacement cost coverage can help you rebuild your home and replace your damaged belongings with new ones, up to a point. Here are some coverage limitations to be aware of, as well as ways to extend your coverage.
extended and guaranteed replacement coverage
Let’s say the replacement cost of your home is $400,000. If a tornado destroys your home and you have replacement cost insurance, you can expect to receive $400,000 from your insurance company to rebuild. however, you may need more if, for example, your entire city was affected by the tornado and the cost of building materials and labor increases.
That’s when extended replacement cost coverage comes in handy. this rider to your policy offers more coverage on a percentage basis, usually 10-50%. In our example above, if you insure your home for its replacement cost of $400,000 and you have a 25% extended replacement cost coverage plan, your home would actually be insured for $500,000.
If you want even more coverage, you can opt for Guaranteed Replacement coverage, which repairs or rebuilds your home and replaces all your belongings, no matter what the cost.
scheduled personal property coverage
There are also policy limits on replacement cost coverage for your personal belongings, particularly valuable ones. Standard policies often don’t fully cover electronics, jewelry, musical instruments, outdoor gear, special collections, or anything that’s worth a lot of money. For full coverage on these and similar items, you should consider scheduled property coverage.
how to estimate the replacement cost of your home
It’s best to make sure your home insurance covers the full replacement cost and that the replacement cost is accurate.
The replacement cost of your home depends on its age and style, how large it is, any improvements you’ve made, local construction costs, and many other factors. it is not the same as the current market value of your home, which depends on the real estate market.
A quick formula to help you estimate the replacement cost of your home is to multiply your square footage by the local construction costs per square foot. To find the average construction cost per square foot in your area, enter your zip code into an online calculator.
Calculate the replacement cost of your home by multiplying its square footage by local construction costs per square foot.
Your insurance policy should work for you so you won’t be surprised by out-of-pocket costs if you ever have to rebuild your home or replace your belongings. We’re proud to offer full, non-depreciating replacement coverage for your belongings on most of our policies (this is the case unless a state requirement allows someone to be underinsured), as well as 25% enhanced reconstruction coverage. % in case construction costs increase after a catastrophic event. Those are just two of the ways hippo continues to reinvent modern home insurance.