Replacement Cost May Not Be Enough to Replace Your House

With natural disasters recently in the headlines, it’s a good time to review your home insurance policy and determine if you have enough coverage to replace your house regardless of the state you live in: Ohio, Rhode Island, Tennessee, Vermont, Pennsylvania, because disasters can happen anywhere. Keep in mind that replacing your home in the wake of a natural disaster will cost significantly more than replacing a single home lost due to an isolated incident. For this reason, you should become familiar with coverages such as “inflation guard” and “extended replacement cost” on your home insurance policy.

You probably know by now that you need to insure your home to its full replacement value, which means the cost to rebuild your house from the ground up should it be completely destroyed. However, have you considered the effects of inflation and fluctuating supply and demand on the replacement cost? The overall economy, as well as local economic conditions, can have a large effect on the replacement cost of your home. You should keep these factors in mind when determining just how much is enough when insuring your home.

Many home insurance policies contain a coverage feature known as inflation guard. The idea behind inflation guard is to help the replacement cost on your homeowners insurance policy keep pace with changing economic times. Instead of reevaluating your replacement cost throughout the policy year, an inflation guard feature on your policy can automatically increase the replacement cost by a certain percentage, usually 2-5%, during the policy year.

But while inflation guard is a highly beneficial coverage, some homeowners mistakenly believe it will cover them in all situations and do not thoughtfully review their policies every year. This simply isn’t the case. You still need to review your policy at each renewal to properly assess the replacement cost of your home. In booming economic times, construction activity often increases, which places a higher demand on both labor and materials, driving up their cost. Being aware of these changes in the economy, as they can help you properly evaluate how much it would cost to rebuild your house.

In a more isolated economic situation, the aftermath of a natural disaster can significantly increase the cost to replace your damaged or destroyed home. Natural disasters create an immediate demand in the local area for labor and materials that often cannot easily be met with current resources. This drives up the price of rebuilding your home in a way that cannot be easily predicted or estimated. To help homeowners in these unique situations, the insurance companies sometimes offer extended replacement cost coverage.

Extended replacement cost coverage functions like inflation guard, except that it increases your replacement cost policy limit by a more significant percentage. In most situations, it can increase your dwelling limit from 25-50% above the original replacement cost. This increased limit can have an enormous impact on your ability to replace your home after a natural disaster. If you live in areas that are prone to such losses, you should consult your insurance company to see if the coverage is available and at what cost.


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