Guaranteed Replacement Home Insurance: All You Need To Know

Home insurance proves to be life-saving when an individual loses their home to a natural disaster or fire. But the biggest turn-off is when the amount of homeowners’ insurance coverage falls short of rebuilding the house.

It is where guaranteed replacement cost home insurance comes into the picture. Guaranteed replacement cost means the insurance will cover the total cost of house rebuilding, making it easy for the owners to return their assets to their previous condition.

Check out this post from Surex to learn about the top home insurance carriers in Canada.

Why choose guaranteed replacement cost home insurance?

Guaranteed replacement home insurance liberates individuals from the worry of arranging sufficient resources for rebuilding their homes which could be damaged due to any unforeseeable situation. It’s impossible to get a precise estimate of the cost of rebuilding a home. Therefore, signing up for guaranteed replacement costs is the best solution.

The downside is that guaranteed replacement home insurance isn’t available in every area. Hence, individuals must research to find the best insurance deal in or around their residential area.

Conditions of guaranteed replacement cost home insurance coverage

You must comply with specific requirements to qualify for insurance coverage. Here is the list of significant conditions:

  • You must sign home insurance up to the total replacement cost. The insurance company or its agent generally decides the value. They use an evaluation tool to determine the exact replacement cost.
  • Individuals must notify their insurance provider of changes in their home’s value. For example, if you renovate your home or extend any part of it, your property’s value will likely increase, and so will its replacement value. Your insurance policy will need appropriate adjustments accordingly. Hence, you need to inform the insurance provider to make the necessary changes to the procedure. Note that the increase in home value varies according to renovation types.
  • Accept the annual adjustments to the homeowners’ or renters’ insurance policy. Your home’s rebuilding cost could be affected due to inflation or any other factors. The insurance coverage may need to be increased to update the values accordingly.
  • The home should be rebuilt on the same site.

How does the home insurance guaranteed replacement cost differ from the market value?

When you buy a home, you not only have to think about its structure, design, and size but also about protecting it. Otherwise, your investment will be in danger if it is destroyed due to an unfortunate incident.

People generally calculate the value of a house, but determining the insurance cost is equally important. And to get the best out of the insurance policy, it’s best to sign up for guaranteed replacement costs so that it can be quickly rebuilt in case anything happens.

The builder calculates the cost of rebuilding an asset. It is to be noted that the replacement cost is more than the sales or market value of the home. And it’s not easy to figure out the rebuilding costs as many factors affect the actual price.

What are the different loss settlement options in guaranteed replacement cost?

Guaranteed replacement cost comes with various loss settlement options such as —

  • Extended replacement cost
  • Replacement cost
  • Guaranteed replacement cost
  • Actual cash value

Every settlement option works differently. These options’ policy rules vary from one insurance company to the other.

Restrictions in guaranteed replacement cost

The guaranteed replacement cost restrictions may vary from one provider to another. Hence, it’s crucial to review the lender’s insurance policy before signing the ‘dotted line’. Insurance coverage for home rebuilding is limited to the amount mentioned in the policy if the applicant doesn’t comply with all the conditions mentioned.

Keep in mind you are signing up for the guaranteed replacement cost to cover the entire rebuilding cost of your home. So if you won’t keep track of the restrictions, you may have to bear the expenses out of your pocket.

Some insurance providers automatically add guaranteed replacement costs on their policies for vacation property, primary residence, or rental property. However, some lenders don’t provide guaranteed building replacement insurance on vacation or rental properties. The coverage of their insurance is limited only to the policy amount.

Determining the guaranteed replacement insurance cost of a property

The calculation of guaranteed replacement cost is based on multiple factors, including the ones listed below –

  • Usually, builders carry out several building projects in one go. Hence, they can source the building materials at comparatively less cost as they buy bulk supplies. It results in significant discounts. There are fewer probabilities of getting bulk deals on buying one toilet seat or two doors. So it’s best to allow your contractor to make the purchase.
  • The process of rebuilding a house is a tricky one. Builders need to take all the protective measures to ensure the safe and cost-effective completion of the project. There should be no damage to the existing landscaping or neighbours’ property. It will increase both the cost and time of rebuilding the home.
  • Rebuilding a home starts with removing all the debris from the property. And it leads to expense. This cost is to be taken into consideration when determining the rebuilding cost.
  • The rebuilding costs go up if there is significant damage to the property. Hence, it’s essential to play safe and hire an experienced contractor specializing in restoration and reconstruction. Specialization in asset rebuilding is also required to deal with the unique requirements or restore the old home’s special features.
  • The changing building and construction codes, such as updated wiring systems, new sprinkler systems, revised price of building materials, etc., may lead to increased rebuilding costs.

What is guaranteed replacement cost? — Endnote

Guaranteed replacement cost is an expensive insurance policy add-on. Usually, it costs around 5-10% of the net policy premium. In other words, if the annual compensation of the policy is $1,000, then adding guaranteed replacement insurance will cost $50 – $100 extra. However, it will be worth it, given its benefits. If you are confused about the need for the insurance, contact an insurance professional who can help you make an appropriate choice.