Guaranteed Replacement Cost: What You Need to Know

If a covered peril, like a fire or other natural disaster, damages or destroys your home, your insurance will help pay to repair or rebuild it. Rather than depreciating certain aspects of your home and personal property, leaving you to cover a portion of the cost, guaranteed replacement cost coverage makes you whole again, even if it costs more than expected to rebuild your home.

Guaranteed replacement cost coverage is arguably one of the best insurance products to have in the event of damage to your home, shielding you from inflation and out-of-pocket expenses — but it does come with some downsides. Here’s what you need to know.

Benefits of guaranteed replacement cost coverage

Replacement cost coverage can be invaluable for homeowners, protecting them from depreciation due to the age or condition of their home’s structures and features, including the roof or a fence. You’ll set your coverage limits when buying a policy directly or through an agent, which specifies how much coverage your insurance company will provide after a loss.

Labor, services, and materials prices can increase, though, due to things like inflation or a large-scale disaster that affects many homes. If this happens in your area, you may find that your coverage limits are too low to adequately repair or rebuild your home. And with standard replacement cost coverage, you may be left holding the bag for the amount above your policy limits.

Guaranteed replacement cost coverage gives you peace of mind and protection against rising costs. This coverage ensures that your insurance company will foot the full bill and rebuild your home to its original condition, even if those costs exceed your policy limits.

Generally, there’s no limit to how much a guaranteed replacement cost policy will pay to make you whole after a partial or total loss.

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Limitations of guaranteed replacement cost coverage

A guaranteed replacement cost endorsement can be the best way to protect you and your home from an unexpected loss, as it covers the actual cost of your repair or rebuild. But you should keep some potential downsides in mind.

The first is that you’ll typically pay more for this coverage. Since guaranteed replacement cost insurance has no limit and can protect you even if repair expenses rise, your home insurance company assumes a greater risk. This means the coverage tends to cost more.

You could be overbuying insurance in some cases, too. Many standard and extended replacement cost policies allow for rebuild costs that are 10%, 20%, or even 50% over your home’s base dwelling coverage amount. If your home is damaged, you may find that your standard coverage (or a cheaper extended replacement cost rider) would have been enough.^[1]

Unexpected exclusions or special conditions may also be involved in your policy’s guaranteed replacement cost coverage. For example, your home may have originally been built to code, but more recent changes could require your home to be rebuilt differently or with certain upgrades. Most insurance companies will rebuild your home as it was, but any newly required updates are at your expense.

Guaranteed replacement cost vs. actual cash value coverage

Actual cash value (ACV) coverage reimburses you for the current value of your home, its features, and your personal belongings. This valuation method considers depreciation due to age, condition, and even market value. ACV is often the more affordable home insurance coverage option because the risk to the insurer is less.^[2]

So, say fire destroys your home, which you insured for $300,000. Your insurance company will pay to rebuild it up to that coverage limit but will deduct for depreciation if you have a damaged roof, outdated appliances, or old flooring. So even if you spend $300,000 to rebuild in the event of a total loss, you may only receive $280,000 toward your rebuild costs because of depreciation.

Replacement cost value (RCV) coverage doesn’t reduce your claims for depreciation. In the same example as above, your insurance company would pay the entire $300,000 that it costs to rebuild your home with an RCV policy.

You can take this up a notch by purchasing guaranteed replacement cost coverage. This coverage would protect you if your home is destroyed and factors like inflation, limited materials, and rising labor costs swelled the rebuild cost to $380,000. 

Without guaranteed replacement cost coverage, your insurance payout would be limited to $300,000, even though that isn’t enough to rebuild. But with guaranteed replacement cost, the insurance company will cover the added cost, even though it exceeds the policy limits.

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Comparing guaranteed replacement cost with other policies

Aside from the coverages outlined above, a few other home insurance policy options you may see include:

• 

  Standard homeowners insurance policies

  Standard homeowners insurance coverage will pay to repair, rebuild, or replace your home, up to your chosen policy limits, if a covered event damages the home. Unlike guaranteed replacement cost coverage, standard home insurance can leave you footing part of the bill if the repair/rebuild costs exceed your coverage limits.

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  Extended replacement cost policies

  Extended replacement cost coverage will also pay to repair or replace your home up to its insured value. This coverage extends your claim to a percentage above your policy’s standard limits, if necessary, commonly between 10% and 50% more. Unlike guaranteed replacement cost, this coverage isn’t unlimited.

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  Functional replacement cost policies

  This coverage will pay to repair, rebuild, or replace your home with materials that function comparably but may be different or even cheaper than what was originally on your home. This type of policy is more common for commercial buildings or older homes with antique features.^[3]

Guaranteed replacement cost FAQs