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Marsh & McLennan Agency, known locally as Insurance Associates Blog: Title

Marsh & McLennan Agency, known locally as Insurance Associates Blog

How Much Coverage Should I Have On My House?

There are few things in life worse than losing your home to fire or a natural disaster.  Except, that is, discovering in the aftermath that you do not have enough homeowners insurance coverage to rebuild the house back to the way it was before trouble struck.  If you get guaranteed replacement cost coverage, that is unlikely to happen. Why? Because guaranteed replacement cost will pay for the full cost of rebuilding your house back to its previous size and specifications* – right down to the granite countertops, custom bookshelves, and gleaming hardwood floors that you so love.

The reality is that it is almost impossible to estimate to the penny what it’s going to cost to rebuild a home. We take that worry away from you.

When you purchase a home and start thinking about protecting your investment, this is often the first question. The answer is often: More than you just paid for it.

People naturally gravitate to how much they paid for the house, but we’re not insuring it to buy it from you – we’re insuring it to rebuild it in case something happens.  The question you need to be asking is, ‘How much would it cost if a builder needs to rebuild it?

This is why replacement cost is often more than market value for your home, or even what you might be able to sell it for.  Figuring out rebuilding costs can be elusive, as a range of factors contribute to what that actual cost might be. Guaranteed replacement costs takes the guesswork out, assuring that you’re covered – even if you need to rebuild your entire home.

As A Homeowner, You Have Choices

Guaranteed replacement cost is one of a range of choices – called “loss settlement options” in the business – which insurance companies offer to homeowners. Common loss settlement options include:

  • Replacement cost
  • Extended replacement cost
  • Actual cash value
  • Guaranteed replacement cost

Each one works a little bit differently. Different insurance companies offer different things, too. (For example: Travelers Insurance does not offer actual cash value loss settlement for the dwelling on your primary home – it’s only available for secondary homes and contents.

Here’s a breakdown of some of those key differences:

Replacement Cost vs. Guaranteed Replacement Cost

That one word – guaranteed – makes a big difference if you’re facing a total loss of your home.

When you’re issued a policy with just replacement cost, the insurance company works with you to project how much it would likely cost to fully replace your home. You can see the replacement cost and the specific limit for your policy on your declarations page. Replacement cost is provided up to the limit shown on the declarations page.

The replacement cost amount usually gets increased annually – usually by 2 to 5% based on inflation in your area.

Yet, if your home is destroyed and a builder actually estimates that the cost to rebuild is more than that replacement cost figure… then you, as the homeowner, are responsible to make up the difference. That’s why it’s important as a home owner to make sure you know and are comfortable with how much your home is insured for.

Here’s an example: If your home is insured at a replacement cost of $200,000, and in reality it is going to cost $250,000 to rebuild, then you either need to come up with an additional $50,000 or find ways to reduce costs… which could result in a smaller, less-appointed house than you originally had.

Extended Replacement Cost vs. Guaranteed Replacement Cost

With extended replacement cost, your insurance company assures that a financial cushion exists in the event that cost of rebuilding is more than the estimated replacement cost.

Specifically with Travelers Insurance, that cushion is 25 percent above the dwelling amount, as shown on your declarations page. So for a home insured at $300,000, extended replacement cost would give you an extra $75,000 to work with. Yet again, if costs go beyond that extra $75,000… you are on the hook to make up the difference, or rebuild a smaller home. While 25 percent may seem like a lot, there are often circumstances that cause costs to soar well beyond that.

When a hurricane or tornado does a lot of damage in a specific area, the cost to rebuild skyrockets. Everyone is trying to rebuild, and the cost of lumber, labor and building supplies all go up. If you don’t have the right coverage, you are not going to have nearly enough to rebuild.  Premium costs for extended replacement cost are generally lower to guaranteed replacement cost, although some factors unique to your situation may make one or the other more expensive.

Better Safe Than Sorry

Of course, the ideal scenario is that you will never need to use guaranteed replacement cost coverage. That’s why it’s so vital to be proactive in protecting your home.

Yet, if you do need it, you can rest assured that guaranteed replacement cost coverage will provide the money necessary to rebuild without requiring you to shell out additional cash.

Upgrading your homeowners insurance to include guaranteed replacement cost is simple

*Guaranteed Replacement Cost applies to dwelling and requires home improvements over $5,000 to be reported within 90 days – not available with all policies and in all states. Coverage of costs to comply with laws or ordinances is subject to limits.

If you are not sure what coverage you have or would like a complimentary review of your policies with recommendations, please contact me.

Kristy Kuykendall
703-352-8214
kkuykendall@insassoc.com


About the Author: Kristy is the Personal Lines Account Executive at MMA. In this role she applies a client-centric approach to developing insurance solutions and a long-term commitment to client relationships. She specializes in personal insurance for individuals ranging from homeowners to specialty lines including fine jewelry and art-work, to vacation yachts. Kristy began her career in Personal Lines at a small State Farm agency in 1999. When away from the office, Kristy enjoys the outdoor life, cooking and spending time with her family.

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