Insurance companies typically define replacement cost as the cost to repair, replace or rebuild the same property in the same location with materials of comparable quality used for the same purpose. Some insurers' replacement cost clause will discount for depreciation. Always read the insurance policy for a company's definition of replacement cost.

Purpose

Replacement cost insurance is most widely used for home and property owners to cover expenses associated with repairing or rebuilding a home after a disaster. This policy may also include the costs of replacing personal belongings and/or motel expenses incurred for extended periods while a home is under reconstruction.

Amount

Cost of construction materials increase annually. A home you paid $75,000 for 20 years ago may cost $150,000 to rebuild today. Be aware of the value of your home and carry sufficient insurance to replace it. Invest in an appraisal after several years of home ownership to determine how much it would cost to rebuild and if you should increase your protection amount.

Guaranteed Replacement Cost

An upgraded, comprehensive policy is one including a guaranteed replacement cost. Since the replacement cost is often estimated by an insurance agent, this premium policy is guaranteed to cover the cost of rebuilding a home in the event that an agent's figures are under value.

Inflation Guard Endorsement

An inflation guard endorsement added to a replacement cost insurance policy periodically adjusts replacement cost coverage to keep the insurance current with the rate of inflation. It also takes into consideration changing building codes that cause an increase in construction costs.

Not Covered

Floods, earthquakes, hurricanes and other natural or manmade disasters are not covered under a replacement cost insurance policy or even the most comprehensive all-risk policy. These insurances must be purchased separately.

Source:

Lawyers.com

Allen Financial Insurance Group

FindLaw