Can You Afford to Replace Your Home?

Get a Home Quote

Enjoy exclusive benefits with AARP Home Insurance from The Hartford.

Start Quote

If you woke up tomorrow and learned a major storm was barreling your way, would you be ready? Not “grab the flashlight and emergency preparedness kit” kind of ready, though that’s certainly important. We’re talking about being able to replace your home should a storm or other disaster leave it heavily damaged or in ruins.

Although admittedly not the most exciting activity on anyone’s to-do list, taking time now to understand exactly what your homeowners policy does and doesn’t cover could save you a lot of money in the long run.

For example, let’s say your house was insured for $300,000 and the cost of rebuilding it after a fire burned it to the ground was $450,000. Guess whose pocket the additional $150,000 would come from? Yours.

That would not be the case, however, if you have a policy with full and extended replacement coverage. Together, these help provide even more protection, paying 125% or more of the cost of rebuilding.

If sorting out the details of your policy seems a bit overwhelming, fear not. Answering these four basic questions can help you start the process:

1. Do I Have Enough Insurance to Repair or Rebuild My House?

The cost of rebuilding a home has nothing to do with its market value or the amount of your mortgage. What a buyer might be willing to pay for your home or the amount of money you still owe on it are not related to the current cost of the materials, labor and other services associated with rebuilding it. In fact, even if the market value of your home might have declined, rebuilding costs might have increased.

Types of Coverage

Construction prices have risen significantly, according to the Insurance Information Institute (III). You’ll need to be sure your insurance covers the cost of rebuilding your home at current construction prices, the III advises.

Some coverages to consider, include:

Replacement cost coverage, which helps pay for the repair or replacement of damaged property with materials of similar kind and quality.
Extended replacement cost coverage for additional coverage of 25% or more over the limits of your policy. This can be critical if there is a widespread disaster that pushes up the cost of building materials and labor.
Guaranteed replacement cost coverage, which helps pay for rebuilding your home no matter how much it costs, but these policies can be expensive and hard to find.

Additional Coverage Options:

Inflation guard coverage, which automatically adjusts the rebuilding costs of your home to reflect changes in construction costs.
Ordinance or law coverage for help paying the cost of meeting new, often stricter, building codes when you rebuild.
Loss of use coverage to help pay for living expenses while your home is being replaced – typically covering you for up to 20% of your dwelling limit.
Green rebuilding coverage which expands your coverage limits when you use environmentally-friendly materials or processes to repair or rebuild or when you upgrade to more energy-efficient systems and appliances when you replace those involved in a covered loss. Some insurance companies offer this as optional coverage.

Determining the Value of Your Home

Your insurance agent or company representative can help you determine the cost of replacing your home, but for comparison purposes, you may want to do some research on your own or use outside sources.

For a rough estimate, the Rocky Mountain Insurance Information Association suggests multiplying the building costs in your area per square foot by the total square footage of your house. To find out what the building rates are in your area, consult your local builders association or a reputable builder.

Remember to include any special features in your house, such as:

A finished basement
Upgraded kitchen or bathrooms
High-end woodworking or lighting
Structures on your property other than your home, such as sheds and detached garages

2. Do I Have Enough Insurance to Replace My Home’s Contents?

If disaster strikes, more than just the structure of your home is likely to be damaged. Furniture, clothing, valuables and other possessions inside your home can be impacted.

A standard homeowners policy typically provides coverage of 50 to 70% of the dwelling limit for contents. This means that if you have $100,000 worth of coverage on the structure of your home, you would likely be covered for $50,000 to $70,000 to replace the contents of your home.

Check to be sure the level of replacement coverage in your policy is adequate. Although your policy may cover expensive items, such as jewelry, it may limit the payout to $1,000 to $2,000. Other items that may be capped include:

Silverware
Computer equipment
Art
Antiques
Stamps
Coins

Personal Property Coverage

You also need to know what kind of personal property coverage you have. Your insurance agent or company representative can advise you on which type of policy is best for your situation.

A cash value policy helps pay the cost of replacing your belongings minus depreciation.
A replacement cost policy reimburses you for the full, current replacement cost.

The best way to determine the amount of coverage you need is to conduct a home inventory. Having a home inventory will also make it easier to prove your losses for tax purposes. To simplify this task, you can use your smartphone to take photos or videos of your home and store them in their own digital folder. You can even then ask AI tools to create the list for you.

Once you know what you have and how much it will cost to replace, you can add coverage with a scheduled personal property endorsement or floaters. These typically cost about $20 per $1,000 of property value annually, though this can vary by location.

Be sure to keep this inventory in a safe place and to take it with you should there be a disaster. (Digital is best, for these reasons.)

3. Does My Homeowners Insurance Cover All Disasters?

Standard home insurance policies provide coverage for disasters such as fire, lightning and hurricanes. They do not include coverage for flood, including flooding from a hurricane (although there are steps you can take to minimize flood damage).

Thankfully, flood insurance is available through the National Flood Insurance Program (NFIP), and can be purchased from the same agent or company representative handling your homeowners insurance.

4. Is My Coverage Up-to-Date?

An annual insurance policy checkup is the best way to ensure that your coverage keeps up with local building costs and changes in the value of your home and personal property.

Such changes may be due to:

Fluctuations in the market
Improvements you make to your house
Appreciation in the value of jewelry or other personal possessions

Know what your deductibles are so you know how much you’ll be expected to pay before your coverage kicks in. You should also determine if there are any exclusions in your policy for certain types of damage, such as mold, or if your home is in an area at high risk for floods, wildfires, hurricanes or earthquakes.

Remember, your insurance policy is a contract and you need to know what’s in it. Insurance agents and company representatives are here to help, but you have a role as well.

Bottom Line

Don’t put your policy in a drawer somewhere and let it collect dust. Review it every year to make sure you’re covered.

Tips To Navigate the Road of Life

We go the extra mile to deliver insights and brain teasers straight to your inbox. Start your free subscription from The Hartford today.

Home Home Insurance