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Homeowners insurance can help provide support when unexpected events arise. Insurers reimburse you for property damage in two main ways, which are known as replacement cost and actual cash value.

Here’s what you need to know about replacement cost coverage for homeowners insurance:

What is replacement cost coverage?

Replacement cost coverage is a type of homeowners insurance policy that helps pay to replace or repair damaged property without factoring in depreciation. A replacement cost coverage policy can protect both your home itself and your personal belongings.

You can get a replacement policy on most properties, but you may need a modified policy for an older home. Because older homes may have been built with less-common materials, like plaster walls, it can be harder to get a replacement cost coverage policy.

The dwelling coverage part of your homeowners insurance likely includes replacement cost coverage for the structure of your home. It should help provide enough coverage to pay for the costs of repairing or rebuilding your home with the same type of materials.

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Personal property

When it comes to personal property, replacement cost coverage can reimburse you if you need to replace a damaged or stolen item, such as a television. Your coverage will generally provide you with enough reimbursement to purchase a new version of the belonging that’s of similar quality.

Because of this, it can be helpful to keep a running list of your personal belongings and what it would cost to replace them. You may want to take note of items such as:

  • Electronics
  • Appliances
  • Art
  • Furniture
  • Antiques
  • Jewelry

Insurance to value ratio

When you take out a replacement cost coverage policy for your home, the insurance company will take into account the insurance to value (ITV) ratio to determine your premium amount. ITV this is the percentage of the rebuild cost that your insurance carrier will pay for in the event of a covered claim.

It’s common for home insurance providers to require homeowners to purchase coverage that equals at least 80% of the replacement cost of the home. If you don’t meet or surpass that 80% ITV threshold, your insurance provider may not pay out the full amount for a claim.

Check out: High-Value Home Insurance: When Do You Need It?

Types of replacement cost

You have three options for replacement cost coverage: standard, extended, and guaranteed. Let’s take a closer look at how each type of coverage works:

  • Standard replacement cost: When you take out a standard replacement cost policy, the lender uses the current cost to completely repair or rebuild your home when determining the replacement cost. Unfortunately, as time goes by, the cost of repairs generally increases. While a $300,000 standard replacement coverage policy might work now, in 10 years, it could cost significantly more to fully repair your home, leaving you on the hook for the difference.
  • Extended replacement cost: With extended replacement cost, your carrier gives you a financial cushion — usually between 25% and 50% of your dwelling coverage amount — that helps if the cost of rebuilding is more than the estimated replacement cost. For example, say your home is insured at a replacement cost of $300,000, but it ends up costing $350,000 to rebuild it to its original quality. If you have $75,000 in extended replacement coverage, you’d have enough coverage to fully repair the home.
  • Guaranteed replacement cost: This coverage pays for the full cost of rebuilding your home back to its exact previous condition, no matter what. So, if your home costs $350,000 to rebuild to previous standards, you’ll get $350,000 to rebuild it. Because it offers more coverage, guaranteed replacement cost is typically more expensive than other types of coverage.
Standard Replacement Cost ReimbursementExtended Replacement Cost ReimbursementGuaranteed Replacement Cost Reimbursement
Estimated valueEstimated value with a bufferFull value, no matter the amount

How do insurers determine replacement cost value?

A variety of factors determine replacement costs , including the cost of labor and materials, and any improvements you make to your home that could increase the cost to replace it.

Because details about the home can impact the replacement value (think marble countertops vs. tile), it’s important to provide accurate details about the house to your insurance agent when working out pricing.

And since time can increase repair costs, it can be helpful to choose a policy that includes an inflation clause which increases your amount of coverage by 2% to 5% annually.

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What factors affect the replacement cost value of a home?

Many factors can impact the replacement cost value of a home, including the following:

FactorWhy It’s Impactful
Building materialsThe building materials required to rebuild the home, such as windows, doors, roofing, and granite can increase the expected replacement cost.
Personal propertyBelongings such as fine art, tech items, and jewelry can increase your coverage cost. Some personal items (such as jewelry) may only be covered up to a certain limit, unless itemized under a scheduled personal property endorsement.
Square footageThe larger your home is, the more it’ll cost to replace it.

Replacement cost premiums and deductibles

In general, the higher your deductible (the amount you pay out of pocket before your insurance kicks in), the lower your monthly premium will be. The opposite is also true: You can choose to spend less on your deductible, but you’ll pay a higher premium.

Learn more: How to Estimate Your Home’s Replacement Cost Value

Replacement cost vs. actual cash value

Replacement cost and actual cash value are two ways insurers determine how much to pay out for a covered claim.

Actual cash value is a very basic coverage option that tends to be less expensive than replacement cost coverage. With actual cash value, you only get a predetermined amount to rebuild after a covered loss occurs — the amount it would cost to replace your home today. So, if the cost to replace your home in the future is higher than your actual cash value coverage, you’ll have to pay the difference out of pocket.

Good to know: Replacement cost policies don’t factor in depreciation, so it’s possible to get enough coverage to fully rebuild your home with materials of the same quality — without paying more than your deductible. Because of this, replacement cost value coverage is typically more expensive than actual cash value coverage.

Here are some pros and cons of replacement cost and actual cash value:

Replacement CostActual Cash Value
  • Can receive up to the full replacement cost
  • Home will be rebuilt to previous quality
  • Less expensive than replacement cost
  • More expensive than actual cash value
  • May need to pay out-of-pocket costs
  • Depreciation can lower value of policy

Replacement cost vs. market value

A policy like guaranteed replacement cost allows you to receive the full funds necessary to repair or rebuild your home back to its former standards after filing an eligible claim. With market value coverage, you get enough coverage to equate to the market value of your home — the price you paid for the home — not what it would cost to rebuild it to its previous condition at today’s prices.

This can be higher than the replacement cost, since it also factors in the land your home sits on, which won’t need to be replaced. But if the market value of your home and others in your area drops (or is low to begin with) while the cost of building supplies and labor increases, the replacement value could exceed the market value.

How much replacement cost coverage do you need?

The amount of coverage you need depends on your personal budget and how much risk you’re willing to take on. Here’s how to choose between each coverage type:

  • If you want full coverage, no matter how much repairs cost: Guaranteed replacement cost coverage
  • If you’re comfortable taking your chances on owing a bit out of pocket: Standard replacement cost coverage
  • If you want a buffer in the event repairs cost a bit more than expected: Extended replacement cost coverage
  • If you want more affordable coverage and can pay out of pocket for repairs: Actual cash value coverage

You should ideally purchase enough coverage to fully rebuild your home in the event of a disaster. Consider how much you can afford to pay for your premium, and how much you’d be able to pay out of pocket for your deductible. While you could save now on a less-expensive policy, it could lead to higher out-of-pocket costs in the future. Think about your unique financial situation when shopping for a homeowners insurance policy.

Learn more: How to Change Homeowners Insurance

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About the author
Jacqueline DeMarco
Jacqueline DeMarco

Jacqueline DeMarco has been a personal finance writer for over seven years and is a contributor to Credible. She has contributed content to more than a dozen financial brands, including LendingTree, Credit Karma, Fundera, Chime, MagnifyMoney, Student Loan Hero, ValuePenguin, SoFi, and Northwestern Mutual.

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