For homeowners insurance, there’s a pivotal coverage that’s gaining traction, especially in the face of unpredictable natural disasters and fluctuating market dynamics: Extended Replacement Cost. But what is it, and why is it becoming increasingly essential for homeowners?
Extended Replacement Cost Explained
Extended replacement cost increases your coverage limit on your homeowners policy to ensure you have adequate coverage to rebuild your home. At its core, it’s an enhancement to the standard policy. Sometimes you’ll see it referred to as Extended Dwelling Coverage.
While the policy covers damages to your home up to a certain limit, the extended coverage ensures that if rebuilding costs exceed this limit, you’re not left footing the bill.
Some policies will throw in this coverage along with others and call it something like their “Gold” homeowners package. Others simply only offer it on an a-la-cart basis. Check with your agent to see how your policy works.
Why Would I Need It?
Imagine a scenario where a natural calamity, say a wildfire or a hurricane, wreaks havoc in a region. Not only does it lead to widespread destruction, but it also results in a surge in demand for construction materials and labor. This sudden spike can mean that the actual cost to rebuild homes surpasses the amount many homeowners have insured their homes for.
Inflation has also had a huge impact on rebuild cost. In a lot of situations the cost to rebuild a home has surpassed the amount it’s insured for as a result.
How Does it Work?
Typically, when homeowners insure their property, they consider the dwelling’s current market value or the price they paid for it. However, the real metric to consider is the replacement cost – the amount it would take to rebuild the home from scratch, using similar materials and adhering to current construction standards.
Now, if the replacement cost is higher than the insured amount due to unforeseen market changes, that’s where Extended Dwelling Coverage steps in. It allows homeowners to increase their dwelling coverage by an additional percentage, often ranging from 10% to 100%, ensuring that they have a safety net in case of escalated rebuilding costs.
Extended Replacement Cost vs. Guaranteed Replacement Cost
While Extended Dwelling Coverage offers an increased limit, there’s another option offered by some insurance companies: Guaranteed Replacement Cost. This coverage promises to rebuild or repair your home for either an unlimited amount or a set dollar amount that is usually very high.
It’s a more comprehensive safety net, ensuring homeowners won’t have to delve into their pockets, regardless of how high rebuilding costs soar. Openly is one of the few insurance companies that offer this option. Their policy offers a Guaranteed Replacement Cost of $5 million.
How Much Extra Does it Cost?
Costs vary by carrier but in general it’s inexpensive for what you’re getting. On average it will add about $30 – $50 per year to your policy premium.
Sometimes this coverage is automatically included in a package of coverages and could be referred to as a “Gold Package” or “Premier Package”. Other times it may only be available as an individual add on.
What Do We Recommend?
For all the different whistles and bells and options you can add to a homeowners insurance policy, we think this one is worth it. We recommend a minimum Extended Replacement Cost of 25%.
For a small increase in cost you can protect against a large potential gap in coverage. Our Homeowners Insurance Coverage Guide dives into this and other minimum recommended coverages so you can choose the perfect policy for your needs.
The Bottom Line
With the increasing unpredictability of natural disasters and the ever-changing dynamics of the construction market, Extended Dwelling Coverage is not just an add-on; for many, it’s becoming a wise financial choice.
At $30 – $50/yr it’s a small price to pay for peace of mind, ensuring that if the worst does happen, the path to rebuilding and recovery is as smooth as possible.