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Will your home insurance really replace your home?

By Scott Van Voorhis on October 4th, 2011

More and more people are seeing their homes swept away by nature's fury only to come up short when it comes to rebuilding them using their homeowner insurance.

In a real estate market now full of pitfalls, unwittingly choosing skimpy home insurance coverage may be a big financial peril. Here are the various levels of coverage to choose from:

  • The bare minimum. "Replacement cost" insurance has a somewhat misleading name, because in some cases, homeowners do not receive enough money to completely pay for a rebuilding project. The insurer will pay whatever the replacement cost is on your policy--whether it be $150,000 or $300,000--and not a dime more. This is basically an estimate of what it would take to rebuild your home, based on average local labor and construction costs, but often the actual cost is higher. While insurance companies are increasingly using sophisticated software programs to come up with these estimates, construction prices vary widely around the country.
  • The next step up. "Extended replacement cost" insurance policies typically add another 25 to 30 percent to your basic replacement expenses, providing you with some extra money for rebuilding. This is the kind of policy that could come in handy in the wake of a natural disaster. When everyone is trying to rebuild at once, it can send construction prices soaring.
  • Full coverage--or something close to it. "Full replacement value" is the gold standard of homeowner insurance policies. Your insurer won't stop cutting checks once the replacement value has been reached, within certain limits. Read your policy carefully. For example, if the reason it costs so much to rebuild is because your town decided to impose new building regulations, you could be out of luck. Still, this may be as close as any homeowner in the current economy will get to a "guarantee" that he or she can rebuild. An insurance quote for this policy is likely to come in roughly 5 to 10 percent more than for basic replacement cost coverage.

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