What is replacement cost coverage?

In homeowners insurance, eplacement cost is the amount it would cost to replace or rebuild your property using materials and goods that are of a similar quality and that are currently available.

Replacement cost coverage insures your property for what it would cost to repair or replace your damaged property without subtracting its depreciation. This number may be different than your home's market value.

How does replacement cost coverage work?

The decisions you make when your first buy home insurance impact how much your provider pays on a claim. Replacement cost coverage is a good example of this.

Insuring your property for its replacement cost value means your insurer pays to replace it with property that's similar in quality. Your other option is to insure your property for its actual cash value (ACV). Insuring your home for its ACV means your provider deducts depreciation from your claims payout.

Many home insurance companies automatically offer replacement cost coverage for the structure of your home. Your personal property, like appliances, fixtures, and furniture, is usually insured for its actual cash value. That doesn’t mean you can’t opt for replacement cost coverage; you may just have to ask for it.

Even when you get replacement cost coverage, you may be surprised by your payout after a claim. That’s because most insurance companies first pay your property’s actual cash value, and then reimburse you once you’ve replaced or repaired the item.

Replacement cost example

Let’s say you bought a new flat-screen television for $2,000 three years ago. Unfortunately, it’s stolen, so you file a claim on your home insurance. With an actual cash value policy, your insurer subtracts a certain percentage for three years of depreciation. Now here’s what happens if you have replacement cost coverage:

• Your insurance provider sends an initial payment for the TV’s depreciated value.
• You purchase a new television similar to the stolen one and submit the receipt to your insurer.
• Your insurance provider pays you the difference.

The cost of replacing your property may be more the original item’s price tag, but your home insurer usually still pays. Just be sure to check your policy terms. Replacement cost coverage payouts cannot exceed your policy property limits.

Insurers also have a minimum requirement for replacement cost coverage. This is called the 80/20 rule. Essentially, your insurance policy must cover 80% of your home’s replacement value. Come up short, and your insurance provider may only pay a portion of the replacement costs.

How is my home’s replacement cost calculated?

At Kin, we calculate your home’s replacement cost for you. Our formula takes into consideration:

• Your total square footage (not including the land your home sits on).
• Your local construction costs.
• Your home's frame and exterior.
• Your home's style (Cape Cod, Victorian, etc.).
• Total number of rooms and bathrooms.
• Roof type and materials.
• Your home's unique features and architecture.
• Other structures on your property.

But to give yourself a rough estimate of your home's replacement cost, you can multiply the square footage of your home by your local construction costs per square foot.

Do I need replacement cost coverage?

You might want to invest in the replacement cost coverage if:

• You can't make repairs on your own. A person with carpentry or construction experience may be able to forgo replacement cost coverage. But if you're all thumbs when it comes to repairs, then broader coverage might make sense.
• You have valuable personal property. Expensive and hard-to-replace items may justify the additional expense. Take a home inventory to see just how much you may be on the hook for after a disaster.
• You invested in new property. You may want the extra protection for additions, renovations, and upgrades.
• The peace of mind is worth it. Replacement cost coverage does cost a little more than ACV insurance, but it offers significantly higher payouts when you need to make a claim.

Getting an actual cash value policy may save you money on premiums, but it can leave you underinsured when it’s time to file a claim. Do your research and talk to an agent to make sure you’re adequately insured.

How to get replacement cost coverage

First, you can buy your home insurance through Kin. We offer policies that have replacement cost coverage for your dwelling, and you can choose to have replacement cost coverage for your belongings, too. But if you’re going through another provider, ask if your policy is written on a replacement-cost basis.

If you already have a policy, you might want to check the coverage. The information you need is typically listed under Coverage A (dwelling coverage) and Coverage C (personal property protection).