It’s true that home insurance is not mandatory unless you acquired your home through a mortgage?

That, however, doesn’t change the fact that homeowners insurance is necessary. After all, no one really knows when a disaster like a fire or a particularly powerful windstorm may partially damage, or worse, destroy your house entirely.

With home insurance coverage, you at least stand a chance of rebuilding your home without draining your finances.

If you don’t have a home insurance policy yet but are considering shopping for one, know that there are many things you need to consider before you settle on the right policy for your needs.

One of the many considerations is whether an insurer can offer extended replacement coverage and guaranteed replacement coverage.

Let’s take a closer look at both types of coverage and see why you may need either when the time comes.

Why Consider Getting Extended or Guaranteed Replacement Coverage

The most significant component of a standard home insurance policy is your dwelling coverage, which protects your home’s structure.

When you file a claim for dwelling coverage, your insurance provider will compensate you up to your coverage limit.

Many homeowners insure their homes for the same amount they spent acquiring it. That means if you purchased your house for $250,000, your coverage limit would also be a quarter of a million dollars.

The problem is, it’s almost certain that the cost of rebuilding your house from the ground up after a covered peril destroys it will be higher than your coverage limit.

If a significant amount of time has passed between the day you insured your home and the day a covered peril wrecked it, a number of factors will ensure that rebuilding it will cost you more than the dwelling coverage indicated in your home insurance policy.

For example, the cost of building materials and labor typically rises over time. And if a covered natural disaster is responsible for the destruction of your home and that of many others in your area, you can expect the high demand for labor and construction materials to drive costs up.

Factors like inflation and market volatility can also lead to higher rebuilding costs.

So, if your dwelling coverage limit is at $250,000, a complete rebuild of your house today will likely cost $300,000 or even more. That’s $50,000 more that you have to pay out of pocket to restore your home after a disaster.

You can, however, avoid this situation by upgrading your home insurance policy to include either extended replacement coverage or guaranteed replacement coverage.

The question is, which one should you go for to get the best possible protection for your home?

What You Need To Know About Extended Replacement Coverage

When an insurance company offers extended replacement coverage, it indicates that they are willing to give you extra breathing room, usually 25% or even 50% of your original dwelling coverage limit.

By upgrading your homeowners insurance policy with extended replacement coverage, you are at least assured that the entire $300,000 bill for rebuilding your $250,000 home that was razed to the ground by, say, a wildfire, will be paid for by your insurer.

What Guaranteed Replacement Coverage Can Offer

Without a doubt, getting extended replacement coverage is already a great deal. It can spare you from paying out of pocket more than you need to.

However, it is not the only upgrade available for your dwelling coverage. Nor is it your best option as far as add-ons to your home insurance policy go.

That distinction belongs to guaranteed replacement coverage, which covers the full cost of rebuilding your home regardless of the final price tag.

So even if restoring your home costs $450,000 or more, your insurer will pay for that entire amount if you opted for guaranteed replacement coverage.

Extended replacement coverage is good, but guaranteed replacement coverage is infinitely better. It provides the best possible protection for your home, especially in cases of total loss.

However, not too many insurance companies offer guaranteed replacement coverage. In contrast, most insurance companies routinely provide their home insurance policyholders the opportunity to upgrade to extended replacement coverage.

The Cost of Upgrading Your Coverage

If you go for extended replacement coverage, you can expect to pay $25 to $50 more annually for your home insurance policy, depending on the amount of additional coverage you choose.

As for guaranteed replacement coverage, the cost of adding it to your policy may vary from insurer to insurer, but you can be sure that it’s going to be much steeper given its scope.

Your location will also determine the final price of your upgrade. If the area where your house stands is often at risk for natural disasters, you will likely pay more for the guaranteed replacement cost add-on.

Whichever add-on you settle for, you can be sure that if your house takes a severe beating from a covered peril, you will have sufficient support from your insurance company to restore your home to its original state.