Many home and business owners in America chronically underinsure their properties because they feel it unlikely they will suffer a total loss, a situation that occurs when the repairs to the property cost more than the property is worth.
While underinsuring your home can save you on insurance premiums in the short term, you could get stuck with enormous out-of-pocket costs following an actual home-destroying catastrophe. Knowing your reconstruction cost estimate (RCE) before committing to a home insurance plan will help you prepare for the worst and ensure you receive proper compensation for a total loss.
What is a Reconstruction Cost Estimate (RCE)?
A Reconstruction Cost Estimate calculates how much it would cost to rebuild your home from scratch, using similar materials, if it got destroyed by a covered peril.
RCEs function differently than home appraisals, which calculate the current value of your home, the surrounding land, the condition of your home before the accident, property sales nearby, and special features of the neighborhood, such as schools and police stations.
In contrast, your RCE would only match the building cost for your home in labor, materials, and building permits.
Why is a Reconstruction Cost Estimate Important?
Knowing your RCE will prevent you from setting your dwelling coverage limits too high or too low when applying for home insurance. Dwelling coverage reimburses you for physical damage to your home and any attached structures occurring from an official list of natural phenomena known as covered perils.
Say you have your dwelling coverage set at $150,000, but your home’s RCE has a value of $250,000. If a covered peril like a fire or falling tree destroyed your home, you would get paid a maximum reimbursement of $150,000 to rebuild it, leaving you to cover the remaining $100,000 out-of-pocket. You can avoid this by learning your RCE before an accident and setting your dwelling coverage appropriately.
How is a Reconstruction Cost Estimate Calculated?
Homeowners insurance agents look at a long list of features and data points when calculating your reconstruction cost estimate. These calculations add up the price of all the necessary building materials per square foot, multiply that total by the total square footage of your house, then factor in the cost of labor and any required building permits.
You can individually get your replacement cost estimate by figuring out these numbers and typing them into a free online home insurance calculator. You can also hire a private appraiser to provide a professional second opinion on the figure provided by your insurance company.
Factors That Influence Replacement Cost Estimates
Several details that your insurance company factors into your replacement cost estimate include:
- Square footage
- Construction cost, materials, permits, and labor
- Number of rooms
- Architectural style
- Interior and exterior walls
- Roof condition and materials
- Number of stories
- Year built
- Type of foundation
- Heating and cooling equipment and systems
- Home fixtures, improvements, and renovations
- Interior finishes, doors, and carpentry
- Plumbing and pipe systems
- Electrical systems and wiring
Each of these factors can significantly affect your RCE. For example, suppose you live in an older home that has difficult or expensive to-replicate features–such as custom molding or plaster work–or outdated plumbing and electrical systems. If this were the case, your rebuilding cost could be much higher than a newer home. Or, if you live in a remote location, your home will probably carry a higher RCE simply due to the inaccessibility of building materials and the necessary cost of transporting them.
When To Get a Reconstruction Cost Estimate?
The best times to get a replacement cost estimate would be right before taking out a new homeowners insurance policy or immediately after making significant renovations to your home. You’ll want to update your policy annually to adjust for outside factors like inflation and regularly inform your insurance agent of any home upgrades that might alter your RCE.
Due to the rising cost of building materials, inflation, and the increased likelihood of extreme weather nationwide, you must keep your dwelling coverage up-to-date to ensure the highest possible payout following a disaster. You can easily accomplish this by utilizing your replacement cost estimate.
Do You Need Extended Or Guaranteed Replacement Cost Coverage?
While adding extended or guaranteed RCE insurance to your homeowners plan will raise your premiums, you receive further protection if rebuilding costs exceed your dwelling policy’s limits. While you don’t necessarily need policy supplements, you should consider adding them to your plan if you live in a disaster-prone area or anywhere with limited building supplies or heavy construction regulations.
Extended replacement coverage pays to have your home rebuilt to its original condition, even if the rebuilding cost exceeds your dwelling limits. The maximum extended coverage you can get typically falls between 25 to 50 percent of your regular dwelling coverage limit. So if you initially set your dwelling limit at $400,000, you’d receive an additional $100,000 with a 25% extended replacement policy.
Guaranteed replacement cost coverage operates similarly, though without any reimbursement limit. No matter how much it costs to rebuild your home, this policy add-on guarantees a 100% payout without any personal out-of-pocket cost.
Difference Between Replacement Cost and Actual Cash Value
When estimating reconstruction costs on your home, you should always consider replacement cost value over actual cash value. Under an actual cash value policy, your insurance agent factors in your home’s depreciation when deciding your final payout. Cash value policies could negatively affect your final settlement, as your home and all your belongings inside will get valued lower and lower the longer you’ve owned them.
Replacement cost basis reimburses you for all the rebuilding costs of your home, with no mind to depreciation. Say your town suffered a severe fire and your house burned down; replacement cost coverage would let you fully rebuild your home and replace all your lost belongings at current market value. Replacement cost value coverage solicits a higher monthly premium but assures you of maximum reimbursement in the event of a total loss.