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What is Extended Replacement Cost on Homeowners Insurance?

By on February 25, 2014 in Insurance, Money

What is Extended Replacement Cost on Homeowners Insurance?When you are shopping for homeowners insurance one of the items you can select if called Extended Replacement Cost, Extra Replacement Cost, or Cost Plus coverage. This is something you can easily overlook or avoid purchasing because it can add some dollars to your annual insurance premium.

Unfortunately, skimping on this coverage to save a few dollars today can end up costing you tens of thousands of dollars if you actually need to use your homeowners insurance. Not taking extra replacement cost coverage can be very costly in the long run.

What is Extended Replacement Cost, Extra Replacement Cost, or Cost Plus Coverage on Homeowners Insurance?

Your homeowners insurance coverage is made up of several different types of coverage that cover your home under different circumstances.

First you have your standard homeowners insurance replacement cost coverage that insures your home up to anticipated normal replacement costs for your area. The insurance company estimates what the value of your home is, and how much money it would take to completely rebuild the structure under normal circumstances. This type of coverage is useful if something happens to just your home instead of an entire city or area of homes.

However, you may need to file a claim with your homeowners insurance during a time that many homes in a given area are impacted due to a natural disaster. In these unfortunate times, the normal cost of rebuilding that your homeowners insurance covers will likely be unable to cover the rising costs of rebuilding materials and construction labor in your area. It is a stark difference to have an entire city impacted and hundreds of homes damaged to an instance where just your home is damaged.

In the times of natural disaster where building material and labor costs go up substantially, your Extended Replacement Cost coverage kicks in to add an additional 15% to 25% of coverage to your homeowners policy. This extended amount is designed to cover those rising costs and allow you to be able to rebuild or repair your home despite rising costs everywhere.

How Extended Replacement Cost Coverage Saves Your Finances During a Natural Disaster?

Is this added cost to your homeowners insurance really necessary?

Let’s run some numbers to estimate how much money this additional coverage can save you if your home is damaged or destroyed in a natural disaster.

Let’s assume your home will cost an estimated $200,000 to rebuild under normal conditions. If you had an unfortunate single home house fire, your insurance company would help you coordinate the rebuilding of your home under normal building material prices.

However, that same $200,000 rebuilding cost after a big natural disaster might rise to $230,000 (15%) to $250,000 (25%). If you don’t have additional replacement cost coverage the extra $30,000 to $50,000 cost (depending on building material and labor cost increases) would fall on your shoulders.

Even if you don’t anticipate a natural disaster in your area, you never know what nature is going to throw at you. Considering the relatively small difference in your annual homeowners insurance premium, getting extended replacement coverage seems like a wise financial decision.

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