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If a major disaster strikes and causes serious damage to your home, you may need to replace it. Depending on the age of your home, the cost to rebuild it might be much higher than you expected due to increased demand and a shortage of contractors and materials.

That’s where extended replacement cost comes in. It’s an optional add-on to your homeowners insurance that covers sudden increases in construction and labor costs after a fire, flood, or related event.

Here’s what you need to know about extended replacement cost:

What is extended replacement cost?

Also known as increased dwelling coverage or extended dwelling coverage, extended replacement cost is an endorsement to your homeowners insurance policy that helps cover higher rebuilding costs outside your control.

If your home sustains severe damage by a major disaster and the cost to repair or rebuild it exceeds your dwelling coverage limit, extended replacement cost coverage can help out. It can increase your dwelling coverage limit by an extra 25% to 50%.

Good to know: Without extended replacement cost coverage, your insurance will only pay for structures and personal property up to your specified policy limits.

How does extended replacement cost work?

In most cases, you can purchase extended replacement cost coverage from your homeowners insurance company in increments between 25% and 50%. It’s based on how much it would cost to rebuild your home, rather than the home’s market value.

Extended replacement cost insurance may protect you financially in the event it costs more to rebuild your home than your original dwelling coverage limit. Essentially, its goal is to get you back to your standard of living after a disaster without requiring you to foot the bill for any additional labor and construction costs.

Important: Forgoing this extra coverage may lower your homeowners insurance costs a bit, but you also leave yourself financially vulnerable should a disaster occur and destroy your home.

Extended replacement cost example

Imagine you insured your home with a dwelling coverage limit of $250,000. One day, a tornado causes serious damage to it. Since other homeowners in your area experienced the same thing and need to rebuild their home too, the cost of labor and materials goes up.

Your contractor estimates it’ll cost $300,000 to rebuild your home, so you’ll have to come up with the additional $50,000 on your own. If you invested in a 50% extended replacement endorsement on your policy, your coverage will extend up to $375,000 and cover the cost to rebuild your home.

Here’s a summary of how this scenario looks with standard replacement coverage vs. 50% extended replacement cost coverage.

Coverage levelDwelling coverage limitClaim payoutOut-of-pocket expenses after payout
Standard replacement coverage$250,000$250,000$50,000
50% extended replacement cost coverage $375,000$300,000$0

What extended replacement cost covers

Extended replacement cost covers the additional costs that come with rebuilding your home to its pre-disaster condition. It includes the price of:

  • Building materials
  • Supplies
  • Appliances
  • Labor

How much extended replacement coverage you choose to add to your policy determines the payout you receive. Remember that if the cost to rebuild your home exceeds your new limit, you’ll have to pay for the remaining balance.

Who needs extended replacement cost?

It makes sense to pay extra for extended replacement cost coverage in certain situations. For instance, if you live in an area that’s prone to wildfires or severe weather, this add-on insurance can give you some much-needed peace of mind.

In general, extended replacement cost coverage is a good idea if you can afford the small increase in your premium.

How do you determine the coverage limit for extended replacement cost?

Your home insurance company will look at several aspects of your home to figure out your coverage limit for extended replacement cost, including:

  • Age of home
  • Square footage
  • Number of bedrooms
  • Number of bathrooms
  • Roof type
  • Garage type
  • Heating system
  • Number of floors
  • Home improvements that have increased your home’s value
  • Special features, such as a fireplace, skylight, patio, etc.
  • Additions like a finished basement or in-law apartment

Let’s say you have a newer home with five bedrooms and four bathrooms. Your home also features exotic wood floors, copper ceilings, and an aluminum roof. In this case, your coverage limit would likely be higher than it would if your home only contained three bedrooms and two bathrooms and was built with cheaper materials.

If you’d like, you can estimate the coverage limit on your own. Simply multiply the total square footage of your home by local, per-square-foot building costs, which you can find through a real estate agent, insurance agent, or builders association in your community. The National Association of Home Builders is a good resource as well.

Tip: Search for replacement cost calculators online and input your information to get a quick estimate.

Another option is to contact a local appraiser. They can come to your home, inspect it thoroughly, and provide an accurate estimate for the cost of rebuilding. They’ll create a list of everything that would be needed to rebuild your home so you can share it with your insurance company.

How does extended replacement cost compare to other coverage options?

Extended replacement cost is one coverage option that determines your actual value of protection and may affect your homeowners insurance premium. Other coverage types include:

  • Actual cash value (ACV): ACV differs from extended replacement cost in that it only covers the cost to rebuild your home after accounting for depreciation. A home insurance policy based on ACV is the least expensive as claim payments tend to be lower.
  • Standard replacement cost: Standard replacement cost will reimburse the amount it costs to rebuild your home, up to your dwelling coverage limit. It doesn’t consider depreciation or your home’s current market value.
  • Guaranteed replacement cost: With guaranteed replacement cost, your insurance company will reimburse the cost to rebuild your home, regardless of the amount. It’s considered the “gold standard,” though it’s not offered by all insurers and comes with a higher price tag than the other types of coverage.

How much does extended replacement coverage cost?

The cost of extended replacement coverage depends on the insurance company, location and value of your home, and the coverage amount you choose.

In general, however, you can purchase extended replacement cost insurance that covers anywhere from 125% to 150% of the costs to rebuild your home. It may add an extra $25 to $50 per year to your regular premiums — but again, your cost may vary.

High-risk areas, such as those susceptible to wildfires or other severe weather, might require you to pay more for extended replacement cost coverage than places with milder weather conditions year round.

How to purchase extended replacement cost

If your finances allow it, extended replacement cost coverage is likely worthwhile. In the event you decide to move forward with it, check with your insurance provider to make sure they offer this add-on.

You might also want to shop around to explore other insurance companies and their options. Then, understand your coverage limits, decide how much you want to purchase, and follow your insurer’s directions for doing so. If you need some assistance, you might want to consult a licensed independent insurance agent.

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About the author
Anna Baluch
Anna Baluch

Anna Baluch is a personal finance freelance writer with years of experience writing for well-known media outlets in the business and personal finance space. Her work can be found on media outlets like The Balance, Freedom Debt Relief, LendingTree, Credit Karma, Nav, and RateGenius. She holds a bachelor’s degree in marketing from Northwood University and an MBA from Roosevelt University.

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