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What is the Difference Between Replacement Cost and Guaranteed Replacement Cost?

We understand what replacement cost is: the estimated dollar figure required to rebuild your home from the ground up in the event of a total loss. Stands to reason, replacement cost is the cost to replace your home; but what about guaranteed replacement cost? What does that mean? Is there a difference? Which coverage is better? Don’t fret – we’re here to clear up confusion surrounding the difference between guaranteed replacement cost and replacement cost.

What is Replacement Cost?

With replacement cost insurance, your insurance company will pay to repair or replace damaged portions of your home without considering depreciation. For example, if you experience hail damage to your shingles, with replacement cost, the insurance company will not factor in that the shingles are seven years old and not worth as much as new shingles, they will simply replace the damaged shingles with new ones; this is replacement cost. However, the replacement cost is subject to a maximum amount.

For example, if your home’s estimated replacement cost is $250,000 and you experience a total loss, having to rebuild from the ground up, your insurance company will pay to rebuild your house, up to $250,000.

What is Guaranteed Replacement Cost?

What if it costs more than $250,000 to replace my house? What if $250,000 wasn’t estimated properly? Now what? This is where guaranteed replacement cost comes into play.

Guaranteed replacement cost is just that, it’s guaranteed. This means if you experience a total loss and must rebuild, the rebuild is not capped at the total amount of replacement cost, i.e. $250,000.

If your replacement cost is estimated at $250,000 and the rebuild costs $310,000, the total cost of the rebuild will be covered under guaranteed replacement cost coverage. Guaranteed replacement cost coverage guarantees that the insurance company will put you in the exact same position you were in before the loss; this means you can rest assured knowing that the beautiful home you’ve created will be protected and rebuilt, no matter the cost.

What Does Guaranteed Replacement Cost Cover?

That being said, guaranteed replacement cost is put in place for your protection; it ensures your home will be rebuilt without the worry of running out of funds. As with most insurance coverage, guaranteed replacement cost is designed to put you back in the same place you were in prior to the loss. The fact that funds do not cap out is a huge stress reliever.

Does a Guaranteed Replacement Cost Insurance Policy Cover Home Upgrades?

A guaranteed replacement cost policy is a guarantee that the home you had previously will be rebuilt, while the floors and finishes will be replaced using the same or as similar as possible materials that were in place prior to the loss. Should the homeowner decide to make some upgrades during the repair or rebuild as a result of a claim, then typically the homeowner would be responsible for the difference in cost between what was in the residence at the time of the loss and the upgraded material(s) and/or fixture(s). It is for this reason that a dollar figure is still attached to a guaranteed replacement cost policy.

Ensure Guaranteed Replacement Cost is Accurately Calculated

It’s imperative that your home’s replacement cost be accurately calculated. A guaranteed replacement cost policy is designed to ensure your home is rebuilt in the event that something unexpected happens, such as:

  • Perhaps excavation of the old materials from the home is more costly now than it was when your policy was first implemented.
  • Perhaps the price of metal has sky-rocketed over the last three months and your policy has yet to renew and adjust for new the new pricing.

It is for these reasons that guaranteed replacement cost was designed. Coverage to give you peace of mind that no matter what the economic climate, or unforeseen hurdles that may pop up during rebuild, your home will be erected back to its former glory.

Does Guaranteed Replacement Cost Come at an Added Cost?

When shopping for homeowner’s coverage, guaranteed replacement cost sounds like the obvious choice. Of course, as with everything, additional promises come at an additional price.

Depending on the specifications of your home, a guaranteed replacement cost policy can come at a rather large additional premium. Some companies will not offer guaranteed replacement cost for older homes or some state that their guaranteed replacement cost is subject to 120% of the stated replacement cost. It’s important to discuss these details and limits with your agent or broker before deciding which coverage choice is best for your home.

Guaranteed Replacement Cost vs. Replacement Cost Summary

  • Replacement cost is a predetermined estimation of how much an insurance company will pay you to replace your home in the event of a total loss.
  • Guaranteed Replacement Cost means that your insurance company guarantees that they will cover the costs to rebuild your home in the event of a total loss, even if that cost exceeds your policy’s limits.  

So which one suits you best? Talk with your independent insurance agent to find out which one is right for you.