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Guaranteed Replacement Cost for Homeowners Insurance

Guaranteed replacement cost is the highest level of coverage you can select for your dwelling coverage portion of homeowners insurance.

Read Time: 6 mins

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Homeowners insurance will help policyholders repair or replace their entire home or the parts of their homes that are damaged in a covered peril. This policy often covers the items inside the home and their replacement. Each policy allows you to pick different levels of coverage for your home and the items inside. This is where guaranteed replacement cost comes into play.

Guaranteed replacement costs give the most coverage when it comes to homeowners insurance. Due to its comprehensive nature, it often results in a larger insurance premium.  Guaranteed replacement cost is a great option for those who have many valuable items inside their home that will need to be replaced in case of a total loss.

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When selecting guaranteed replacement cost, it is important to understand how it works and what the benefits of this type of upgraded coverage are. Keep reading to dive deep into guaranteed replacement cost so you can understand it better.

Key facts
  • Guaranteed replacement cost covers the difference in price due to inflation and other factors in the case of a claim.
  • Guaranteed replacement cost is one of the highest-coverage options a homeowner can acquire.
  • Due to its comprehensive nature, guaranteed replacement cost often comes with a higher annual premium.

How does guaranteed replacement cost work? 

Guaranteed replacement cost has no coverage limit. When you receive the payment for the claim, it provides you with the amount you need to cover all items that are lost within the home without depreciation affecting the total. Essentially, it allows you to rebuild or repair your home in a way that is similar to how it was before the covered peril occurred.

For example, if your home experiences a fire and the adjuster places it at a total loss, your insurance policy will prepare the check for the claim. When completing the claim, they will look to see how much dwelling coverage you have listed for your policy. 

If your home is covered for $500,000 initially, but the price of construction materials goes up by $50,000, your home insurance will send a check for $550,000 minus the deductible. In most cases, a homeowner’s deductible is $1,000, so the check total would be $549,000. This means the home can be replaced even with the new pricing, and the homeowner does not have to pay the difference out of pocket.

Not every insurance provider offers guaranteed replacement cost, so it is important to review whether or not the insurer you are considering offers this or not, especially if this is the type of insurance you prefer.

Extended replacement cost vs guaranteed replacement cost

Some people opt for extended replacement cost instead of guaranteed replacement cost. This is often due to the price difference in the annual premium for the insurance policy or because it is the only option offered by the insurance provider. Extended replacement cost still offers more coverage than more common replacement cost value type of coverage.

Extended replacement cost will cover an additional percentage or fixed rate (depending on the insurance provider’s policy) of the cost to replace or repair a home above the dwelling coverage. 

For example, if you have insured your home with a total dwelling coverage limit of $400,000, and you have extended replacement cost that offers 20% more coverage to account for increased prices, then you can expect to see $80,000 in additional coverage to cover the gap. This is helpful as it will help cover unexpected costs, but keep in mind it would not cover the total additional cost if the pricing went up more than 20% of the dwelling coverage.

On the other hand, keeping the same scenario in mind, if a homeowner was to have guaranteed replacement cost, and the materials for the repair went up 100%, the entire amount of the difference would be covered in this scenario. This means that the owner would not need to find the other 80% as they would need to if this occurred with extended replacement cost.

While the cost savings are significant when a claim is made, it can also be a significant increase in premium. Homeowners should consider this when selecting an option and consider the pros and cons for each before making a final decision on which type of policy to select.

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How much is guaranteed replacement cost?

There is no set premium for guaranteed replacement cost. The cost will largely depend on the insurance company, the home’s age, the home’s location, and the home’s size. It is safe to say that this upgrade is considered to be one of the more expensive add-ons for home insurance policies. 

Some experts estimate that the cost of guaranteed replacement cost adds somewhere around 5%-10% of a policy’s total premium. This could mean that a policy with an annual premium of $2,000 per year will see an additional $100-$200 increase to the annual policy.

In order to know a precise cost in your case, you should get a quote from your insurance company. They will be able to use the information they have on file for your home to provide you with a quote so that you can have a better idea of what to expect if you select this type of coverage.

When is guaranteed replacement cost beneficial?

Guaranteed replacement cost is always considered the Cadillac of homeowners insurance options. While this is true, it is often also true that some homes in certain locations could benefit from this type of insurance more than others.

If you live in tornado alley, for example, you might consider adding a replacement cost add-on to your home insurance policy since there is a much higher chance that you will lose your entire home in the event of a natural disaster than if you live in New England where tornados are much less frequent.

Another key example is someone who lives in Florida. Although Florida does not have regular tornados, they do suffer from severe hurricanes. These hurricanes can cause total destruction of a home. A guaranteed replacement cost add-on will benefit homeowners who need to rebuild after this type of covered peril.

Insurance for peace of mind

Your home will be one of your biggest investments. Insuring it properly will not only protect that investment but also provide you with peace of mind. Guaranteed replacement cost is a great way to insure your home and your sanity is protected in case the unexpected occurs.

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Katelyn is a freelance copy editor and writer based in Massachusetts. She holds Bachelor's Degrees in Business Administration and Political Science, both from Fitchburg State University, as well as a Master's Degree in Public Administration from UMass Amherst. In her free time, Katelyn enjoys reading, traveling, and spending time with her family.
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