Replacement Cost Insurance

What Is Covered by Replacement Cost Insurance?

Homeowner roof in need of replacement

If you’re shopping around for homeowners insurance or other property insurance, you’ve probably already seen the term “replacement cost.” What does it mean, and how does it affect your coverage and premiums? Luckily, replacement cost insurance is pretty simple once you cut through the jargon.

We’re here to help walk you through replacement cost insurance and its cousin concept, actual cash value insurance, so you can make the right coverage decision for you and your family. Once you’re ready to pull the trigger, our expert independent insurance agents are here to do the hard work for you. They’ll round up quotes, find you discounts and answer all your questions. Go forth and shop confidently!

What is replacement cost insurance?

Replacement cost insurance is a coverage option for property insurance policies, especially homeowners insurance. It pays for the replacement cost of your home and belongings. Replacement cost is the amount of money it costs to rebuild your home as it was before if it’s destroyed, or to purchase brand new items if your old ones are damaged or stolen.

Replacement cost insurance is usually the default option when buying homeowners insurance. If you’re not sure what kind of homeowners insurance coverage you have, you probably have replacement cost insurance. (But it’s a good idea to double-check!)

Replacement cost insurance is the alternative to actual cash value insurance, which is a coverage option that only pays for the actual cash value of your home and stuff. The actual cash value of your items is almost always lower than the replacement cost. That’s because things depreciate, or lose value, over time. For example, a 5-year-old TV is worth less than a brand-new one, even if the new one is a comparable brand and model.

A few rare items actually appreciate, or gain value, over time. This is especially true for art, precious metals and gems, firearms, fine jewelry and some antiques. These items will need special treatment in your insurance policy to make sure that they’re covered for their full value, and you may need to purchase additional insurance, even if you opt for more comprehensive replacement cost insurance over actual cash value insurance.

Keep in mind that neither replacement cost insurance nor actual cash value insurance will pay for you to buy more expensive stuff to replace things that were damaged. If you owned a mid-range HD flat screen TV, your replacement cost insurance won’t pay for you to upgrade to a top-of-the-line 4K model. (And actual cash value insurance will pay for much less.) This also applies to building materials for your home, so don’t plan on upgrading to marble countertops from Formica if you have to rebuild.

Which is better, replacement cost insurance or actual cash value insurance?

Replacement cost insurance is a better choice than actual cash value insurance for most people. That’s because it allows you to replace your home and stuff without needing to dip into your savings or other assets. The downside is that replacement cost insurance has higher premiums than actual cash value insurance, because the insurance company is on the hook for more money if you need to file a claim.  

This means that if you have a lot of savings and assets, you may decide that you’d rather take a chance and save money on premiums. You’ll need to contribute more of your own money in case of fire, theft or another disaster, but you’ll free up extra money in your monthly or quarterly budget.

Another situation where it can make sense to choose actual cash value insurance over replacement cost insurance is for a second home or vacation home. Because you’ll still have your primary residence, it's not likely to be as urgent for you to rebuild that second property. Saving money on premiums might be a higher priority for you in this case.

However, if you don’t have a lot of savings or are in a lot of debt, you should almost certainly choose replacement cost insurance. In fact, a mortgage or other type of loan may require you to carry replacement cost insurance so that they can be certain you’ll keep up on your payments in case the worst happens. In these cases, it’s better to deal with the higher premiums each month than it is to get hit with a nightmare scenario where you’re homeless or out essential belongings with no money to replace them.

What is extended or guaranteed replacement cost?

If your home is totally destroyed, you might end up pushing the limit of your insurance policy in order to replace it, even if you have a replacement cost policy. Insurance companies will not pay more than the limit of your policy even if it’s going to cost more than the limit to rebuild your home exactly as it was. (This extra cost could be because of a labor or materials shortage in your area that’s driving up construction costs, or because materials in your original home are now rare or difficult to work with.)

In response to this scenario, some insurance companies offer an extended replacement cost or guaranteed replacement cost option. Extended replacement cost policies extend your limit by a certain percentage, like 10% or 20%, if that money is needed to rebuild your home. Guaranteed replacement cost pays to rebuild your home exactly as it was, with no limit on cost.

Both of these options can be significantly more expensive than a regular replacement cost policy.

How much does replacement cost insurance cost?

It totally depends on the value of your home and your stuff. Larger homes are more expensive to insure than smaller ones. Even silly things like having recessed lights or lots of corners in your home can push your costs up, since those details are more expensive to rebuild and replace than simpler designs.

High-end electronics in particular can drive up your costs with replacement cost insurance. That’s because electronics depreciate much faster than other types of items, even though their replacement cost stays about the same. That means you may need a higher limit to cover that replacement cost, which leads to higher insurance premiums.

Remember that replacement cost insurance is a type of coverage. If you’re buying homeowners insurance and choose the replacement cost option, the cost of replacement cost insurance is one and the same as the cost of your homeowners insurance.

As a rule, replacement cost insurance is more expensive than actual cash value insurance, but you get more benefit out of replacement cost insurance than you get with actual cash value insurance.

How do I buy replacement cost insurance?

In order to buy either replacement cost insurance or actual cash value insurance, you’ll need to speak to an insurance agent, who will help you pick a company and choose the coverage you want. Independent insurance agents aren’t bound to any one company, so they can shop around for multiple quotes—not just the best quote one company offers. They’ll help answer your questions and weigh the pros and cons of replacement cost vs. actual cash value insurance with you.

Before speaking to an independent insurance agent (and definitely before locking down a quote), you’ll want to make a preliminary list of the items you’d like insured, especially any valuable or appreciating items. Homeowners insurance usually covers your belongings up to a limit, but if you have a lot of expensive stuff, you may need to raise that limit or buy extra coverage.

Definitely tell your independent insurance agent if you own any of these items:

  • Valuable art such as sculptures or paintings
  • Precious metals and gems
  • Firearms
  • Fine jewelry
  • Antiques or heirlooms that you think could be valuable

It’s also smart to make a more general list of your belongings, including furniture, appliances, clothes, media (like books or CDs) and toys. This helps you buy the right insurance and makes filing a claim much easier if you ever need to go down the road, since you’ll know exactly what you lost. Your independent insurance agent can help you do this effectively.

Whether you choose replacement cost insurance or actual cash value insurance, our expert independent insurance agents are with you every step of the way. Good luck and happy shopping!

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