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Extended replacement cost coverage is an optional add-on to your homeowners policy that covers unexpected increases in building labor and materials costs. ( Shutterstock )

When you buy homeowners insurance, the dwelling coverage portion of your policy helps you pay to rebuild your home if it’s damaged by a covered event, such as a fire.

But is your current dwelling coverage limit really enough to rebuild your home if it’s completely destroyed? In times of rising demand for materials and labor, it might not be. Fortunately, you can purchase an extended replacement cost endorsement to ensure you’re financially protected from unexpected cost increases.

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Extended replacement cost is an endorsement to your homeowners insurance policy that changes the terms of the original policy. It provides an extra layer of protection in case you need to rebuild your home due to damage by fire, a severe storm, or another covered disaster.

Extended replacement cost increases your policy’s dwelling coverage limit by an extra 10% to 50% of the cost to rebuild your home. The extra coverage does come with an extra cost, but it could be well worth the additional premium if you live in a high-risk area or building or material costs are rising rapidly.

WHAT IS A HOMEOWNERS INSURANCE PREMIUM?

Many insurance carriers offer extended replacement cost coverage as an add-on to your standard homeowners insurance policy. They typically offer it in increments, as a percentage of your normal dwelling coverage limit.

For example, let’s say your home is insured for $250,000 when it’s leveled by a wildfire. Every homeowner in your community who lost their home during the fire needs to rebuild, so the demand for labor and materials rises, bringing extra costs along with it.

If it costs $275,000 to rebuild your home rather than $250,000, you’d have to come up with the difference yourself under standard replacement cost coverage. But if you have extended replacement cost coverage that adds another 25% of coverage, your new coverage amount is $312,500 ($250,000 x 1.25). That’s more than enough to cover the cost of rebuilding your home.

Extended replacement cost covers the additional costs associated with rebuilding your home after it’s been damaged or destroyed, if the loss is greater than 100% of your coverage limits.

It’s important to note that extended replacement cost only impacts Coverage A (dwelling coverage), which pertains to damage to your house. It doesn’t increase limits for other types of coverage that are normally included in a homeowners insurance policy, such as:

Any additional costs above coverage in these areas are still your responsibility as the homeowner.

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So, how do you know if it makes sense to add extended replacement cost coverage to your homeowners insurance policy? The following questions can help you decide:

The easiest way to determine your coverage limits — both for your ordinary coverage and extended replacement cost coverage — is to work with an experienced insurance agent.

But you can also come up with your own estimates to get some peace of mind. To estimate the replacement cost of your home, multiply your total square footage by local per-square-footage building costs.

New-home construction costs average $100 to $200 per square foot, according to HomeAdvisor. If you have a 1,700-square-foot home, the cost of rebuilding could run anywhere from $170,000 to $340,000. Of course, those are based on national averages, so it’s a good idea to get localized building cost estimates from a real estate agent, insurance agent, or builders association in your community.

Once you know the replacement cost, you can multiply it by 1.10 to 1.50 (depending on the extended replacement cost you want) to determine your extended replacement cost coverage limit.

And keep in mind, you may need higher limits if you have granite countertops, custom cabinetry, hardwood flooring, marble tile, a solar roof, smart systems, eco-friendly materials, and other high-end finishes.

Other factors that can impact the replacement cost of your home include:

WHAT IS HIGH-VALUE HOME INSURANCE AND WHO NEEDS IT?

When you buy a home, other coverage options determine the actual value of the protection you receive and affect the price of the insurance policy. Let’s look at each of these options in detail:

The cost of adding extended replacement cost coverage to your homeowners insurance policy varies depending on your insurance carrier, coverage limits, and where you live. But purchasing this coverage for a home in a coastal community or an area with a high wildfire risk can cost more.

WHAT’S THE AVERAGE COST OF HOMEOWNERS INSURANCE?

If you’re interested in adding extended replacement cost coverage to your homeowners policy, reach out to your insurance agent to get a quote. They may be able to add the endorsement to your policy right away, or at your next renewal date.

Most major insurance providers offer extended replacement cost coverage. If yours doesn’t, it might be worth shopping around for other policies.

Credible makes comparison shopping for homeowners insurance easy. Get quotes from top insurance carriers, all in one place.

Quotes displayed in real-time or delayed by at least 15 minutes. Market data provided by Factset. Powered and implemented by FactSet Digital Solutions.  Legal Statement. Mutual Fund and ETF data provided by Refinitiv Lipper.

This material may not be published, broadcast, rewritten, or redistributed. ©2022 FOX News Network, LLC. All rights reserved. FAQ - New Privacy Policy