Home Insurance Articles
What Is Replacement Cost Guarantee And How Do I Get It?
2009-11-24
Will your home insurance policy actually keep you in a home if it is damaged beyond repair? Until the 1990s, most home insurance policies offered a replacement cost guarantee. Sadly, that is no longer the case. Though you can still get a replacement cost guarantee with your home insurance policy, it is no longer as common as it once was. With guaranteed replacement costs, the insurer pays whatever the cost is to rebuild your home as it had been before it was damaged. This type of coverage shouldn't be confused with being paid the market value of the home or the remaining mortgage on the home.
A guaranteed replacement cost policy is the only policy that will completely pay to rebuild your house. It's important to differentiate it from the other types of replacement cost policies that will pay out based on policy limits, like actual cash value policies. What's the advantage of guaranteed replacement cost? If you have a home that you paid $200,000 for but is only worth $150,000 in a poor economy, an actual cash value policy would only pay you $150,000 - the value of the home. A guaranteed replacement cost policy will pay to rebuild your home at whatever cost, making it as close to original as it can be.
According to a survey by Marshall & Swift/Boeckh, a company that studies building supply data, 58 percent of residences in America are undervalued for insurance purposes. The average percentage of undervaluing is 21 percent. The reason this happens is because many policyholders forget to increase their coverage as construction costs rise, making it more costly to replace their home. To avoid this problem, policyholders need to have their insurance agents reassess their homes when the policies come due. Don't be surprised when the number comes in less than the resale value of your home. Remember you are only buying insurance for the house and not the land it is sitting on. However, if you still think the price is too low, you can hire an independent appraiser and insure your home for that value.
Another thing to have included on your home insurance is an inflation guard rider. This will increase your replacement coverage each year to cover increases in inflation and construction costs. It may cost extra, but it is worth the peace of mind. You might also want a law-and-ordinance rider, which will cover the extra cost to make sure the replacement of your home meets current code. Older homes may have older systems.
You need to ask for guaranteed replacement cost. Otherwise, you might wind up with one of the alternative replacement cost policies or a policy that pays out actual cash value instead.