Guaranteed or Extended Replacement Cost

Guaranteed or Extended Replacement Cost is a type of home insurance policy that offers the highest level of coverage. This policy will pay whatever it costs to put your home back together as it was before the covered disaster--regardless of the limits listed in your policy.

A Guaranteed Replacement Cost policy protects you from sudden increases in construction costs due to a shortage of building materials after a massive disaster or other unexpected situations.

Although it will get your house back to its original state, it generally won't include the cost of upgrading your house to current building codes. If this is a priority, you should get an add-on (they call this an endorsement) to your policy called Ordinance or Law to help pay for these additional costs.

If you own an older home, the cost of rebuilding it to its original glory prior to a disaster may be prohibitive. As a result a guaranteed replacement cost policy may not be available to you.

In this case you might want to opt for an Extended Replacement Cost policy. Although it won't be as unlimited as a guaranteed replacement cost policy, you will generally get 20 to 25 percent more than the limit of a standard policy.

For example, if you took out a policy for $200,000, you could get up to an extra $40,000 or $45,000 of coverage above the limit. 

Since the insurance company will end up paying more out to you in the event of a covered disaster, you will pay a higher premium for extended replacement cost on a homeowners insurance policy. These types of policies offer such great protection that some insurance companies don't even offer them.

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