Homeowners often make the mistake of choosing to insure their home for the amount they could sell it for – the current market value. However, the cost to rebuild your home can greatly exceed its real estate value. To really have full coverage, your home should be insured for the amount it would cost to rebuild should disaster strike.
For instance, if you find a foreclosed home on the market for $130,000, but it would cost $170,000 to rebuild it, you should insure the home for $170,000 you are not losing money in the event of a total loss, like a fire. If you insured the home only for $130,000, then you would be out $40,000 or more to rebuild the home, and you would have to pay that amount out of your own pocket. That is a significant and potentially devastating difference in coverage.
You should also keep in mind that the cost of building materials naturally fluctuates, which calls for some leeway in coverage. In addition, when catastrophes such as tornadoes and wildfires occur, they often result in short-term price hikes in building materials and labor. Extended and guaranteed replacement coverage options can help protect against these unforeseen cost increases.
Extended Replacement Coverage
Most companies offer a special home coverage endorsement called extended replacement coverage, which generally pays an additional 25 or 50 percent over the amount for which the home was insured. So if that $170,000 home burns down and now is going to cost $200,000 to rebuild, extended replacement coverage will pay the extra $30,000 to rebuild.
Guaranteed Replacement Coverage
The best coverage you can ask for is guaranteed replacement coverage. Guaranteed replacement means there is no cap on the amount the company is willing to spend to rebuild your home in the event of a covered loss. So, if due to extraordinary circumstances, your $170,000 home is going to cost $300,000 to rebuild, the company will pay for that extra dollar amount. Though this coverage is not as easily available as the extended replacement coverage discussed above, it does provide excellent coverage.
In addition to insuring your home according to the cost to rebuild, these endorsements can be added to your policy to help further protect against fluctuating rebuilding costs. Keep in mind that these coverage endorsements are not meant to give you an additional wing on your home that was not there before the loss. They are meant to protect you from rising building costs – essentially giving you a financial cushion should a disaster strike.
Contact your Leavitt Group insurance advisor to determine the correct level of insurance protection for your home. We have tools available to estimate rebuilding costs and to help you select the appropriate amount of insurance coverage.