What Happens if Rebuilding Cost Exceeds Home Insurance Limit?

Home insurance is designed to protect the interests of a homeowner in case the home is partially or completely damaged.  The insurance coverage provides the cost for rebuilding or repairs to allow a homeowner to have a fresh start.

When you take out home insurance coverage, you need to calculate the cost to rebuild your home.  Your level of coverage is critical to ensure you have sufficient funds to rebuild your home in the same quality.

How to Calculate Cost to Rebuild for Home Insurance

The cost to rebuild refers to the amount you need to rebuild your home from scratch in case it is destroyed by fire or other covered perils.

You must factor in the cost of labor and materials to build an identical house as the one you have now on your land.

It is different from market value and does not consider the value of the land, location, or other factors that affect market price.  It is also not the same as purchase price or property assessment value.

You need to have an accurate figure so you don’t take out too much or too little coverage for your home.  Taking out too much will mean paying higher premiums than is necessary. Taking out too little coverage will leave you exposed to financial risks as you will pay for the difference in cost in the event that your home needs rebuilding.

Steps to Calculate Rebuilding Costs

1. Do you research. Don’t be shocked to learn that the home you bought for $200,000 may cost $300,000 to rebuild. Replacement cost can be higher than buying a similar property because rebuilding should match the home that was destroyed.
2. You can contact a contractor to get an estimate. It will take into account cost of labor, materials, and debris removal.  There are contractors that offer insurance work and can help you calculate the cost.  Considering that you need to replicate the exact design and features of your home, older homes with thick wood and larger windows may cost more to replace.
3. You can also research the average building cost per square foot in your neighborhood. This will also give you a ball park figure and it could be lower than what you actually need.

Check your Policy’s Limit for your Dwelling

If you already have home insurance, it is a good idea to periodically check your policy’s limit for your dwelling. Research shows that most Canadian homes are underinsured.

Remember that if rebuilding cost increases and your insurance coverage doesn’t match, you will have a huge problem in your hands if the unthinkable happens and you need to rebuild your home.

Have you remodeled your home lately or made any additional structures? You need to adjust your level of coverage.

For new homeowners, you can request for a replacement cost estimate during your home appraisal.

If the cost to rebuild exceeds your home insurance limit, you will need to pay the difference in price.

Guaranteed Replacement Cost Coverage

Insurers recommend that the amount of home insurance coverage is equal to the estimated replacement cost. You have the option to purchase guaranteed replacement cost coverage for your dwelling.  This means that the policy will pay for rebuilding your home, no matter what the cost.

This is a big advantage for home owners because it is impossible to predict what the exact rebuilding cost is 2 or 3 years in the future.

This type of coverage is more expensive and the choice of how much replacement cost you choose is yours to make.

The important thing to ensure is that you have enough coverage to replace your home in case it is damaged by fire.

Another important thing you need to check with your policy is if it requires rebuilding in the same location.

Know what your Home Insurance Covers

Home insurance coverage varies widely among insurance providers.  When choosing a policy, ensure that it meets your specific needs.

Home insurance provides coverage for the dwelling, contents or personal property, and liability (including spouse and children below 18).

Your home insurance also covers additional living expenses if you are temporarily forced to vacate your home due to an insured loss.

Learn more about the types of home insurance coverage that can protect your most important investment.

Insurance Coverage for Your Personal Property

As we are talking about rebuilding your home in the event of a fire or other disaster, it is also pertinent to think about replacement of your personal property.

If you compile a list of what is in your home with their costs, it will surely amount to a lot of money, too.  It would also be a huge financial burden to replace all of your property from your own pocket.

For this reason, home insurance also covers a home’s contents.  You can choose between actual cash value or full replacement value.

Actual Cash Value vs. Full Replacement Cost

Insurance companies charge a lower premium for actual cash value coverage.  That’s because the home owner shoulders the price difference when replacing lost or damaged property.

As an example, your $10,000 living room set which you purchased 3 years ago will be compensated less depreciation cost.  If it costs more today, you pay for the difference in price.  But if you have full replacement cost coverage, you will be compensated for the cost to replace the set with the same or like quality at current prices, without deduction for depreciation.

Tips for Buying Home Insurance

Most Canadians will say they can’t afford to replace everything they own if an unforeseen event happens.

If you are buying home insurance and you worry about losing your home to a natural disaster or fire, consider these simple tips.

1. Buy insurance that provides coverage for your actual rebuilding cost. With severe weather events wreaking havoc all over Canada, it is important to get an accurate replacement value for your house.
2. Prepare an inventory of your home’s contents, including electronics and jewelry. Most experts recommend getting contents insurance at 50% of your rebuilding cost.  If you have expensive items like art and other collectibles, you can ask your insurer about buying additional coverage.
3. Review your rebuilding cost coverage and personal property coverage every year to make sure it is up to date.
4. Always get a free home insurance quote before buying home insurance.

Where to Buy Home Insurance – Insurance Broker or Agent

Are you confused about where to buy home insurance, broker or agent?

We have insurance brokers and agents in our network representing various insurance companies in the country.

Insurance brokers work with multiple insurers while insurance agents represent one insurer exclusively.  Both brokers and agents are qualified to offer insurance products and help you determine the right coverage and price.

If you have a preferred insurance provider, you can work with a qualified insurance agent. However, if you wish to explore all your options, an insurance broker can help you with various offerings from multiple insurers.

Don’t Take Risks with your Home Insurance

Many homeowners buy home insurance then simply forget about it until the time comes when they need to make a claim.

There is nothing more painful than when the help you counted on during a very difficult time goes bust due to a technicality.

An insurance contract demands contractual obligations on the part of the insurer and the home owner.  For your part, it isn’t only about making your premium payments on time.

You also need to make sure that you inform your insurer about any additions you make to your property, about any changes to your lifestyle (such as getting a Pit Bull as a new member of your family), and about running a business from your home.

It is important to inform your insurance company of any changes that could pose additional risks to you to ensure your insurance is effective.

Failure to disclose details to your insurer could result in claims denial or even cancellation of your home insurance.

Receive Your Home Insurance Quote from a Canadian Insurer

There are so many insurance companies in Canada. How do you choose yours?

Our partner insurance brokers and agents represent more than 20 insurers.

Fill-out our free short online form to receive a quote from one of our partners for home insurance tailored to your needs.

Feel free to decide if this offer is the right one based on coverage and price.

This home insurance quote is free and no obligation! Find the right home insurance for your peace of mind.