Many times when you apply for a homeowners loan, the bank requires you to insure the home for the entire amount of the loan. The value of the land, which may be substantial, is included in the purchase price, and in the event of a catastrophe, the land generally is not going anywhere. To get around that, insurance companies came up with a guaranteed replacement cost policy. If you reasonably insured your house for $100,000, and after totally burning down it cost $150,000 to rebuild it, the insurance company would be on the hook for the entire $150,000. This relieved the homeowner of the responsibility of insuring his home for the entire amount of the loan if it exceeded the replacement cost of his home.
Due to several recent natural disasters, many insurance companies have discontinued their guaranteed replacement cost policies. Some will provide a percentage of the policy coverage amount at no extra cost, but many will only pay up to the policy limits to rebuild your home in the case of a loss. I strongly urge you to determine the replacement cost of your home, contact your insurance company to see if your current policy will cover that value and increase coverage if need be.
