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Home insurance covers your home for its calculated replacement cost, represented by the dwelling coverage amount, on your policy. This is meant to be enough to rebuild your home from the ground up, and as long as you have enough coverage, it will cover a total loss.

When a home is a total loss, it can’t be repaired and needs to be rebuilt. Home insurance covers total loss of your home as long as it’s caused by a covered peril. You’ll be responsible for your deductible.

If your home is a total loss, you’ve got a lot to deal with. Make the insurance process easier by understanding how your coverage works.

Key Takeaways

  • Home insurance covers your home up to the dwelling coverage limits, which is the calculated replacement cost of the home.
  • If your home would cost more to repair than to completely rebuild, it is a total loss.
  • In states with valued policy laws, the insurance company must pay out the full value of the policy limits in the event of a total loss.

When is a home considered a total loss?

A home is considered a total loss if its destruction is so severe that it would cost more than the home’s value to repair the damages. For example, if your home is valued at $200,000 but it would cost $350,000 to repair the damage, it is a total loss. If the home is too damaged to repair within its valuation, then you will need to buy a new home or rebuild it. 

In some cases, a total loss is clear; if a home has burned to the ground and there is nothing left to repair, it will be a total loss. Your insurance adjuster will determine whether the damage qualifies as a total loss.

What happens if your home is a total loss?

Your homeowners insurance will pay out the replacement cost value of your home, which is your dwelling coverage, in the event of a total loss.

After inspecting your home, the insurance adjuster will create an estimate to repair the damage. If that estimate is higher than the dwelling coverage amount on your policy, the insurance company will pay out that amount.

Some states have valued policy laws, which state that the insurance company must pay out the total coverage limits of the policy in the event of a total loss, even if the rebuild cost is less than those limits.

How replacement cost coverage works with a total loss

Most homeowners insurance policies are replacement cost, which means that the dwelling coverage amount is calculated based on what it would cost to rebuild your home from the ground up, using like materials and quality, at today’s prices.

Insurance companies calculate this amount based on all of the known facts about the construction of your home, and recalculate it annually to keep up with changing costs and inflation. However, it’s still possible to be underinsured.

Unless you have an endorsement on your policy that extends coverage beyond the calculated replacement cost, that limit is the most the policy will pay to rebuild your home, even if the actual cost is higher.

Guaranteed and extended replacement cost

While homeowners insurance only pays up to the policy’s replacement costs, there is a way to get the reconstruction of your home fully covered. You can either add an extended replacement cost or guaranteed replacement cost endorsement to your policy.

Extended replacement cost coverage adds a specific percentage on top of the calculated amount, usually an additional 25% or 50%.

Guaranteed replacement cost ensures that your home will be replaced regardless of how much the actual cost exceeds the limits.

How does a home insurance total loss payout work?

Once the home insurance company has determined that the home is a total loss, it will send you a check. It will be for the dwelling coverage limits minus your deductible, and may also include a payout for personal property lost or damaged in the event.

If you have a mortgage, you will likely need to send the check to the mortgage company to be endorsed. The mortgage company may hold some or all of the money until it sees that work has begun on the rebuild of your home.

If my home is destroyed do I have to rebuild?

You don’t have to rebuild, but you will have to pay off your mortgage if you’ve decided not to. Remember that you still owe your mortgage company regardless of the loss of the home.

While it may be possible to sell the property without any repairs, you may not be left with enough to buy a new home after paying off the mortgage, since land with a destroyed home won’t be as valuable. Consider your options carefully before you decide not to rebuild.

Frequently asked questions

How do I calculate the replacement cost of my home?

Insurance companies have complex tools that calculated the replacement cost of a home. You can also hire an appraiser to do an independent calculation.

Will my homeowners insurance cover all the costs of rebuilding my home?

Not necessarily. Your homeowners insurance will cover the costs of rebuilding your home up to the amount of coverage you have. In order for the insurance company to cover all the costs, you may need to have a guaranteed replacement cost endorsement.

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Nupur Gambhir
Managing Editor


Nupur Gambhir is a content editor and licensed life, health, and disability insurance expert. She has extensive experience bringing brands to life and has built award-nominated campaigns for travel and tech. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service.