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What is Extended Replacement Cost?

What Is Extended Replacement Cost?

Extended replacement cost is an insurance add-on that provides extra coverage to help repair your home after a natural disaster, fire, or other damaging event. 

Homeowners are not required to purchase increased dwelling coverage. Still, it may be beneficial if construction costs rise in your area after a natural disaster or during periods of inflation. Recent studies found that weather and natural disasters cost more than $165 billion in 2022. More disasters mean more insurance claims, which drive up construction prices and premiums. Therefore, enrolling in this additional coverage allows you to get the money you need to get your normal life back.

How Does Extended Replacement Cost Work?

Your home insurance policy comes with a dwelling coverage limit. This is the estimated amount it would cost to rebuild your home from the ground up in the event of a natural disaster. Each year, your insurance company reviews current market and inflation forecasts and adjusts the policy limit as needed. These adjustments, however, may not be enough to keep pace with sudden periods of inflation sparked by economic recessions or natural disasters.

Extended replacement cost insurance, also called extended dwelling coverage, increases your coverage limit to account for potential inflation. For example, if your dwelling coverage limit is assessed at $300,000 and you purchase extended replacement coverage of 10%, your insurance covers up to $330,000 in rebuilding costs.

See It In Action

Consider this scenario: your insurance company calculates that your home would cost $400,000 to rebuild and sets this as your dwelling coverage limit. A wildfire then destroys your home and many others in your neighborhood, and the total cost to rebuild your home increases to $450,000 due to a sudden rise in materials and labor costs.

If you do not have extended dwelling coverage, your insurance company pays $400,000 (minus your deductible), and you pay the remaining $50,000 out of pocket. If, however, you purchase an extension of 20%, your policy covers up to $480,000 in rebuilding costs, meaning you pay only your deductible out of pocket. 

Extended vs. Standard Replacement Cost

Standard replacement cost is the theoretical cost to rebuild your home after a disaster. It does not account for depreciation value or any increase in market price. If your home is destroyed, your insurance company pays out the standard replacement cost up to the limit of your dwelling coverage. This means that if your dwelling coverage is $300,000, this is the maximum amount paid out by your insurance.

Extended replacement cost provides additional funding when the actual cost to repair your home is higher than expected. For instance, if you add 50% worth of replacement cost on your $300,00 coverage, your insurance pays up to $450,000.

Extended vs. Guaranteed Replacement Cost

Guaranteed replacement cost reimburses you for the full cost of your home rebuild, no matter the amount. This means that if you have $300,000 in dwelling coverage with a guaranteed replacement cost add-on, your insurance pays the full amount for rebuilding, no matter the price tag.

Under an extended replacement policy, meanwhile, your payout still has an upper limit. For example, if you have $300,000 in dwelling coverage with 50% replacement cost, you’re covered up to $450,000. If total costs hit $500,000, you pay the remainder, plus your deductible, out of pocket. Under a guaranteed replacement policy, the entire amount (apart from your deductible) is covered by insurance.

What Does Extended Replacement Cost Cover?

Extended replacement cost covers the labor, building materials, and supplies necessary to rebuild your home after a natural disaster or other damaging event. It also includes items such as appliances, fixtures, doors, and other functional home items.

What Is Not Covered?

Extended replacement cost typically does not cover personal property such as clothing, electronics, jewelry, or artwork. Depending on the type of coverage you purchase, personal property may be covered up to a set amount but is not part of replacement coverage. For example, HO-1 policies do not include coverage for personal belongings. Meanwhile, HO-2, HO-3, and HO-5 policies offer increasing amounts of property protection.

How Much Does Dwelling Extension Coverage Cost?

The cost of dwelling extension coverage is based on several factors. First is your home’s location. If your home is in a disaster prone area where issues such as wildfires, tornadoes, or floods are common, your coverage may cost more.

Other factors include your home’s square footage, age, number of bedrooms and bathrooms, type of roof, and heating system. Costs are also impacted by any home improvements that have increased the value of your home or any special features such as a pool, patio, or skylight. Put simply, the larger your home and the more features it has, the more it costs to replace. As a result, extended coverage is more expensive.

On average, homeowners can expect to pay between $25 and $70 per year for this coverage, depending on the above factors and how much extended coverage you buy.

Do You Need Increased Dwelling Coverage?

Not everyone needs increased dwelling coverage. If your area rarely experiences natural disasters and home prices are relatively stable, extended replacement coverage may not be worth the additional monthly premiums.

Suppose you are in a disaster prone location and have just purchased a new home in an up-and-coming area. In that case, meanwhile, extended replacement cost coverage can help offset potential out-of-pocket expenses. 

How to Get Extended Replacement Cost

To get extended replacement cost coverage, contact your insurance company. Replacement coverage is often sold in 10% increments up to 50%, and you can review your coverage options each year in the event you need to add or remove coverage. Not all insurance providers offer extended replacement costs, and the premium costs for these policies may differ by location, disaster history, and local construction costs. 

All in All

Extended replacement cost insurance provides additional coverage for rebuilding your home if it’s destroyed during a natural disaster or other damaging event. If you live in a disaster-prone location or an area undergoing significant inflation, extended replacement coverage can help you avoid significant out-of-pocket payments during the rebuilding process. 

Frequently Asked Questions

Not all homeowners need extended replacement cost. For example, an older home in an economically and climate stable area may rarely require rebuilding. As a result, extended replacement cost would increase homeowner premiums without offering any real value. 

Instead, this coverage is offered as an optional purchase for homeowners living in disaster-prone areas or markets undergoing significant inflation. 

Yes. Other add-on coverages include riders for features such as swimming pools, equipment breakdowns, and buried utility lines. These features all play a role in rebuilding your home to its pre-disaster state and work hand-in-hand with replacement cost coverage. 

Any claim may impact future insurance premiums. Higher costs and more frequent claims mean more risk for insurance companies, which in turn may lead to higher premiums or the insurance company choosing not to offer a policy renewal.

For example, if you purchase a 50% extended replacement cost on $300,000 and claim the full $450,000 in the first year you live in your home, you should expect your premiums to increase the following year. If your home is seriously damaged again two years later, your insurance company may choose not to renew your policy or offer other extended replacement cost options.