Replacement Cost Explained – Home Insurance Basics

Written By Charlotte Insurance on December 23, 2021. It has 0 comments.

a damaged home with a replacement cost insurance policy

There are a lot of technical terms thrown around when discussing home insurance policies. They’re not always easy to understand or obviously important when you first hear them.

Replacement cost is a very important feature of home insurance policies. It’s what can help make you whole again after a serious disaster. Here’s what you need to know about it.

What is Replacement Cost

The simplest definition of replacement cost is that it’s the amount of money that it would take to replace a destroyed home or repair a damaged part of it with exactly what you had or as close as possible.

Replacement cost doesn’t factor in depreciation or appreciation. It looks at the materials used in your home before the peril and tries to get as close as possible to it in repairing or rebuilding your home.

One thing the replacement cost doesn’t consider is the value of the land your home is sitting on. The purchase price of your home is different from the replacement cost because of the value of your lot.

Replacement cost is recommended for home insurance policies because it’s what will make sure you’re closest to your living situation pre-peril and post-peril.

You will still need to pay your insurance deductible, and the replacement cost only pays up to your policy limits. It’s important to make sure your insurance coverage matches the value of your home as closely as possible.

How Replacement Cost Works

Replacement cost is an option for both your dwelling coverage and your personal property coverage under your homeowners policy.

Dwelling Coverage: It pays to repair or rebuild using materials of a similar quality. If your kitchen is damaged in a storm or fire, your coverage will rebuild back to what you had before. Don’t expect a kitchen remodel using higher quality materials.

Personal Property: Replacement cost covers buying replacements that are similar to your original property. For example, if your computer is stolen in a covered claim, you might not be able to get the exact same model, but you’ll be able to purchase one of a similar quality or type.

For personal property coverage, it helps to keep an inventory of your possessions with model information. If you need to file a claim, you won’t have to rely on your memory, and it can make the claim process a little smoother.

Replacement Cost Variations

Standard replacement cost works for most homes. However, there are two other options you may need depending on the type of home you have.

Modified replacement cost coverage: It’s used for older homes made with materials no longer commonly used in home construction. This covers the cost of rebuilding with alternative materials that are commonly used today.

Extended replacement cost coverage: This offers extra coverage so you can rebuild your home exactly as it was, even if the costs exceed the value of the home. This is ideal for homeowners with a lot of custom features or unique construction. It also protects against a surge in construction costs – which can often happen when a natural disaster strikes a large area and many homeowners need to rebuild all at once.

Want to make sure your homeowners insurance includes replacement cost? Contact Charlotte Insurance today! We can answer your questions and offer free estimates for new insurance coverage.

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