Extended Replacement Cost: What Homeowners Should Know

Image of an older man and woman carrying a ladder into a house

Replacing your home after damage is not only time consuming, it can be costly too. And depending on the age of your home, the cost to rebuild may be much higher than you were anticipating (or you might just want an upgrade — who wouldn’t?). That’s where extended replacement cost coverage can come in handy.

Though the dwelling coverage portion of your home insurance policy will pay for rebuilds up to your home’s replacement value, that doesn’t always mean all costs are covered. Especially when something like a natural disaster occurs, materials and labor costs rise because they’re in such high demand.

To prevent paying more out-of-pocket than you need to, it’s smart to think about adding coverage to your policy to extend your limits. When deciding how much homeowners insurance you need, one of the options you have for additional coverage is known as extended replacement cost. 

What is extended replacement cost?

Extended replacement cost is an expansion of your current dwelling coverage limit — it helps cover extra rebuilding costs that are outside of your control. While you’ll want to increase the coverage on your house any time you make upgrades or renovate to reflect its new value, sometimes the construction cost of rebuilding after a total loss can be more than you’d expect.

Extended replacement cost is an expansion of your current dwelling coverage limit — it helps cover extra costs associated with rebuilding that are outside of your control and in excess of the Coverage A limit on your policy.

How does extended replacement cost work?

Most insurance companies offer this endorsement to your regular homeowners insurance policy in increments, usually between 10% and 50% of coverage A. In this way, you’ll be financially covered in the event that rebuilding your home costs more than your original dwelling coverage limit.  

For example, let's say you insured your home for $250,000 — but then a wildfire levels it. Since every homeowner in your area who lost their home to the fire will need to do the same thing — rebuild — the demand, and cost, for materials and labor will increase. This could cause the cost to replace your home to outpace the amount it’s insured for; leaving you with a deficit to pay.

Extended replacement cost insurance adds money to what you can draw from to rebuild, allowing you to afford these increased costs if such an event occurs.

Depending on the percentage you chose, your new coverage amount could be anywhere from $275,000 to $375,000. This is especially valuable for homeowners in areas prone to natural disasters that cover large areas, such as hurricanes, earthquakes or floods. Because the more homes a major catastrophe destroys, the higher the demand will be for construction materials and labor.

What does extended replacement cost cover?

As mentioned above, extended replacement cost covers additional costs associated with rebuilding your home to its previous condition, including purchasing needed supplies, appliances and even labor costs. The amount you have to work with will depend on how much extended replacement coverage you include in your policy. If the cost to rebuild goes above your new limit, you’ll be responsible for paying for the remaining balance.

How much is extended replacement cost?

The annual cost of this policy add-on is dependent on how much coverage you want. While it’s best to speak to your insurance agent about how this new section of your policy will affect your yearly premium, you can expect to pay upwards of $50 extra each year for extended replacement cost coverage. Though this may seem steep when looking at your total payment each year, it’ll be well worth it when you have an extra $50,000 to use to rebuild your home.

When do you need home insurance extended replacement cost protection?

Our experts recommend that all homeowners have some additional replacement cost coverage, as the fees are small compared to the financial costs you could be on the hook for should supply costs rise. Those living in high-risk areas such as on the coast, in flood or earthquake zones, or areas prone to wildfires should consider adding more insurance coverage to their policy given the added risk.

If you’ve been with the same insurance carrier for quite some time, it might be time to take another look at your policy. Construction costs can fluctuate from year to year, so updating your replacement cost coverage to reflect the new reality is a smart move, especially if you plan to stay with the same company moving forward.

Our experts recommend that all homeowners have some additional replacement cost coverage, but those living in high-risk areas should consider adding even more insurance coverage to their policy.

What is the difference between guaranteed replacement cost and extended replacement cost?

While extended replacement cost covers rebuild and replacement costs up to a predetermined percentage, there is another option that provides even more coverage. Guaranteed replacement cost covers the total amount to rebuild your home and replace all personal property, no matter the cost. 

As an example, let’s say that you set up your extended replacement cost to cover you for up to 125% of your dwelling coverage amount. If you had chosen a guaranteed replacement cost coverage instead, you wouldn’t have a limit, as it pays for the entire cost.

Extended replacement cost vs. actual cash value: what's the difference between the two?

Another term you’ll often see as an option for your home insurance policy is actual cash value (ACV). Unlike extended replacement cost, ACV only covers the cost of rebuilding your home once depreciation has been factored in. Over time, your home’s value will decrease based on general wear and tear as well as the age of the home and its assets. Based on the market value of your home, ACV only covers up to the limits of your dwelling coverage, unlike extended coverage that stretches your budget further.

On top of the stress of losing your home, you shouldn’t have to worry about being able to afford the rebuild as well. By adding extended replacement cost coverage to your homeowners insurance policy, you can get well-deserved peace of mind knowing that you’ll be able to financially recover from any setback that comes your way. To add this extension onto your current Hippo policy (or switch over to us from another provider), reach out to one of our agents and we’ll walk you through the process.