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Homeowners insurance will help you repair or replace parts of your home (or your entire home) and valuable items inside it if a covered event causes damage.

You can choose from different levels of replacement coverage for your home — each affects how much your insurer will pay out when you file a claim. Guaranteed replacement cost provides the highest level of coverage when it comes to homeowners insurance, which can bring you peace of mind.

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

What is guaranteed replacement cost?

Guaranteed replacement cost is an endorsement for a homeowners insurance policy. It provides coverage for the full cost of replacing your home, even if the amount exceeds your policy limits. This coverage is an extension of standard replacement cost insurance, which will cover the materials to rebuild your home up to a specified limit.

Labor and construction costs rise with inflation and tend to rise after a natural disaster strikes, when many homeowners in the area file claims. Guaranteed replacement cost coverage comes in handy in these situations, since it covers the cost of labor and materials to rebuild your home no matter what.

Good to know: Guaranteed replacement cost covers perils such as windstorms, hail, and fires, even if these events completely destroy your home.

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How does guaranteed replacement cost work?

There’s no coverage limit with guaranteed replacement cost. It’ll provide you with a payout to replace your home with similar materials, without taking depreciation into account. After an insurer approves your claim, it’ll pay to repair or restore your home to its original condition..

Example: Let’s say you have dwelling coverage for $400,000 and need to have your home rebuilt. The price of materials and construction has gone up and it’ll cost $500,000 to replace your home. If you have guaranteed replacement cost coverage with a $1,000 deductible, you’ll receive a $499,000 payout after paying your deductible.

This type of coverage can vary by insurer, so it’s always important to review your policy to find out if it’s subject to any limitations or exclusions.

Good to know: You typically can’t get guaranteed replacement cost coverage on an older home. Instead, you’ll likely need to get a modified policy that pays for more standard replacement materials, and not those that were used when your home was built.

Check Out: Homeowners Insurance Deductible: What You Need to Know

How does guaranteed replacement cost coverage affect your deductible?

Since guaranteed replacement cost insurance offers more expansive coverage, it’s a more expensive addition to your homeowners insurance premium. The cost for coverage varies by insurer and also by location, and some states don’t offer it. Deductibles also vary by insurer, but you’ll likely have the same deductible options for guaranteed replacement cost that you have for other replacement coverages.

Guaranteed replacement cost vs. other coverages

You have multiple replacement cost options for your homeowners insurance. Here are some of the key differences between them and what you can expect with other levels of coverage:

  • Actual cash value pays a reimbursement based on your home’s current worth (not the cost to rebuild the home). Insurers take the cost to buy your property today and subtract depreciation from that amount.
  • With replacement cost, your policy pays the amount to repair or replace your home with similar materials, without deducting depreciation. Unlike guaranteed replacement cost, standard replacement cost has a limit.
  • Extended replacement cost is another option that offers a higher level of protection. It can pay as much as 20% to 25% more than your policy limit to help account for construction and building material price increases.
  • Market value refers to the amount your home is currently worth, including the value of the land. Depending on different factors, a home’s replacement cost could be higher or lower than its market value. If your home’s value is lower than its replacement cost, market value can be risky, since it won’t cover all your costs if you need to rebuild.

Guaranteed replacement cost is the only option that’ll pay whatever it costs to rebuild your home if a covered peril damages it.

Coverage TypeCoverage LimitDeducts for Depreciation?
Actual Cash ValueUp to home’s current worth (deducting for depreciation)Yes
Replacement CostUp to 100% of the cost to replace your homeNo
Extended Replacement CostUp to 120% to 125% of the cost to replace your homeNo
Market ValueUp to the cost that a buyer would pay for your homeYes, if home's value has decreased
Guaranteed Replacement CostNo limitNo

Learn more: What Is Replacement Cost Coverage?

When to consider guaranteed replacement cost insurance

Guaranteed replacement cost coverage isn’t for everyone and isn’t available in every state. However, this option may be a good fit if you live in an area that’s prone to natural disasters. Since the cost of building materials rises with inflation and labor costs can skyrocket if many homes in your area are hit by a natural disaster, this coverage may be a good choice.

Even if you don’t live in a disaster-prone area, guaranteed replacement cost can provide peace of mind, which may be worth the extra cost.If guaranteed replacement cost coverage sounds like the right option for you, contact your insurance provider to find out if it offers this coverage. Then, compare quotes from at least three different carriers to get the best rate for your situation.

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Disclaimer: All insurance-related services are offered through Young Alfred.

About the author
Choncé Maddox Rhea
Choncé Maddox Rhea

Choncé is a personal finance freelance writer who enjoys writing about mortgages, student loans, and helping people achieve financial wellness. Her work has been featured on sites like Business Insider, Lending Tree, Fox Business, RateGenius, and more.

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