Home Insurance, Don’t Be Fooled By The Use Of “Replacement Cost”
· by Matt Fox · posted March 5, 2008
· filed under Homeowner, Personal Insurance category.
When I’m talking with prospective clients, I’m often surprised at how many people don’t realize that your home insurance does not guarantee the rebuilding of your home. The typical policy issued by almost all insurance companies including Allstate, State Farm, Farmers, Nationwide, and the many other ‘on the corner’ insurance companies will only pay up to the policy limits. They then add an additional percentage for “Extended Replacement Cost.”What is this “Extended Replacement Cost?”
When you buy your homeowner insurance there is an amount listed for dwelling coverage. This is the maximum amount the insurance company will pay to repair or replace your home (assuming it’s insured to the proper value but that’s another article). The “Extended Replacement Cost,” or similar term, simply adds an additional 20% to 50% to the dwelling coverage to help pay to replace your home.
So, if you have a home insured for $200,000 with a 25% extended replacement cost, the most it will pay is $250,000. Any claim above that amount is going to come out of your pocket. This also doesn’t cover some of the other issues you’ll have to pay for like increased cost due to the changes in building codes. Your home policy only pays to rebuild to original condition.
There are still policies out there that do guarantee replacement cost if there is a total loss. A handful of insurance companies are willing to take this risk. The best part…generally it’s not any more expensive than these “extended replacement” policies.
Read your policy carefully. If you don’t know what you’re reading, find someone that can explain it to you. As I like to say, “The true cost of your policy is the premium plus the amount of any unpaid claims.”
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