With global property prices fluctuating each year, it can be a bit difficult to accurately estimate the replacement value of your building or home each year. This can make it hard for you to have peace of mind. Fortunately, there's a way to ensure that your building is covered and that a replacement is paid for without deduction for depreciation. Let’s take a closer look at guaranteed replacement cost and how it works.
What is Guaranteed Replacement Cost?
Guaranteed replacement cost is a property insurance valuation option included in some insurance policies. If you choose this option, your insurance company will pay the total amount for replacing your property, even if it exceeds the limits of your policy. This valuation technique indemnifies you without depreciation and without considering maximum reconstruction payments.
The provision protects you from being underinsured in the event of a complete loss. However, it's crucial to understand this provision's terms and conditions. One of the most important things to know about guaranteed replacement cost is that you leave it to the insurance company to calculate the replacement cost and automatically review it as needed. You must also know that this provision works differently in different states. It's also unavailable in some states, and some insurance companies don't offer it.
How it Works
If you have a standard homeowners insurance package, your home will be covered at its replacement cost. This means that if something happens to your house, your insurer will provide enough money to ensure it's restored to its pre-damage condition. This is done without factoring in depreciation.
However, it's important to note that your insurer only covers you up to the limits specified in your standard home insurance policy. Therefore, if your home was insured for $400,000, but it costs $500,000 to reconstruct it after a complete loss, you'll be left to pay the remainder of the bill from your own pocket. Another option would be to build a less expensive home.
With guaranteed replacement cost, there are no limits. This means your insurance company will pay whatever it costs to reconstruct your home to its original size and specifications. This is the ideal type of cover if you are in an area that's prone to tornadoes, flooding, wildfires, and hurricanes.
The cost of reconstructing homes tends to skyrocket after natural disasters. This is because there will be a high demand for building materials and construction services in impacted communities. Therefore, you cannot rely on the limits set by your standard insurance policy.
Why You Should Consider Guaranteed Replacement Cost
Guaranteed replacement cost ensures that you have peace of mind. As mentioned before, it's almost impossible to estimate how much it would cost to reconstruct your home at any given time. Having a policy with guaranteed replacement cost provisions ensures that you don't have to constantly worry about whether your standard policy is enough.
The prices of building materials and construction services are always changing. This makes it easier to understand why guaranteed replacement cost is the wiser option. However, this provision may not be available in some states. Some areas and insurance companies have what's known as Enhanced Replacement Cost. If you have specific questions relating to how this works, you should find a reliable insurance agent.
It's important to understand your home insurance needs and ensure that it's fully covered at all times. Are you interested in finding out more about guaranteed replacement cost? We can help you figure it out and decide whether it's a good option for your situation. Get in touch with us today for more information. We would love to hear from you.