Setting a Budget for Your Rebuild Using Insurance Coverages
Rebuilding your home after a loss can be both financially and emotionally challenging. One of the most critical steps to simplify the process is setting a realistic, insurance-based budget. While every situation is unique, there are some proven guidelines to help you understand your coverage and avoid costly mistakes.
This Rallyback article walks you through how to establish your rebuild budget effectively, leveraging your insurance coverages and understanding their limitations.
Understanding Your Insurance Budget: Coverage A & B
Homeowners Insurance generally separates your home into two coverage categories (see our Rallyback book entitled Understanding Insurance):
Coverage A (Dwelling): Pays for rebuilding the primary structure of your home.
Coverage B (Other Structures): Covers detached structures like garages, sheds, fences, and pool houses.
Start with A & B Combined
When setting your initial rebuild budget, begin by adding these two coverage limits together. This combined figure provides a general target to work from and though it’s tempting to combined additional coverages listed below into your initial budget, it’s best to leverage those as unforeseen costs arise or increase during the construction process.
For example:
Coverage A (Dwelling): $500,000
Coverage B (Other Structures): $50,000
Total Initial Budget Target: $550,000
Costs to rebuild can vary widely, ranging from $500 to over $1,000 per square foot, depending on your location, Demand Surge, materials, and custom features.
Important Note:
Every homeowner's situation is unique. Your coverage limits and actual rebuild costs will differ significantly based on personal factors, home features, and local market conditions.
Working Closely with Your Builder Early
It's essential to involve your builder early in the budgeting process. A good builder will:
Understand your insurance coverage limits and align construction plans accordingly.
Push back constructively when an architect or homeowner’s vision exceeds realistic financial limits.
Advise early to prevent costly redesigns later.
Pro tip:
Select a builder with significant insurance experience to navigate complex negotiations and maximize your coverage benefits.
Navigating Special Insurance Coverages
Extended Replacement Cost Coverage (ERC)
If your policy includes ERC, you have 20% to 50% additional coverage beyond your dwelling limit. This extra coverage is specifically intended to help manage costs related to demand surge, not to build a larger or significantly upgraded home. See our Insurance related Rallybacks for more information.
Example:
Dwelling Coverage: $500,000
ERC at 25%: Additional $125,000
Total Available: $625,000 to manage rising construction costs (not for upsizing).
Ordinance or Law (Code Upgrade) Coverage
Building codes change frequently, and your rebuilt home will likely need to meet current standards. Ordinance or Law coverage helps pay for these additional, code-required upgrades.
Work with a builder knowledgeable in insurance claims. They can help document code-related expenses clearly, ensuring these costs are properly accounted for and covered.
Landscaping Coverage
Your homeowner policy likely includes separate coverage for landscaping and exterior improvements:
Landscaping budgets typically range from $10,000 to $30,000, depending on your Policy Limits.
Plants, shrubs, and trees can be reimbursed individually (e.g., $500 per plant).
Budget landscaping separately from your Primary Dwelling costs.
Thinking About a Larger Home? Proceed Carefully
If you're considering increasing the square footage or significantly upgrading your rebuild, tread carefully. Here are a few key things to keep in mind:
Insurance Limitations
Insurance policies are designed to replace what you previously had, not to substantially increase the home's size:
If you replace your 2,000 sq. ft. home with a 3,000 sq. ft. home, your insurer will typically cover only the original square footage.
The additional 1,000 sq. ft. would be entirely out-of-pocket.
Because insurance is not responsible for financing a larger home, your expenses would get drastically more complicated because line items, invoices, receipts and other costs will need to be separated between what insurance owes to rebuild your home and what you are financing yourself.
Permitting Constraints
Local permitting offices generally have restrictions on how much you can expand without extensive new reviews:
For example, some counties permit only a 10% size increase without additional complexity.
Accessory Dwelling Units (ADUs) have specific allowances and restrictions, particularly in coastal or urban areas.
Environmental reviews may be triggered with drastically different home sizes and locations.
Budget Impact
Remember, every additional square foot comes at your expense, potentially significantly increasing your out-of-pocket costs. Budget carefully and realistically:
Clearly separate original versus additional square footage in budget documents.
Understand and plan for the financial responsibility and the risk associated with expanding beyond insurance-covered limits.
Primary Budget Document: The Builder’s Estimate/Bid
Your primary budgeting document is the detailed estimate provided by your builder - check out our associated Rallybacks in our Construction book that outlines this further. This critical document includes:
Fixed Fee vs Cost Plus billing
Construction materials and labor costs
Insurance-covered repairs and replacements
Ordinance upgrades and code-compliance expenses
Additional costs may be covered elsewhere such as:
Architectural fees
Permit and inspection fees
Engineering or survey expenses
Temporary housing (if exceeding your insurance coverage limits)
Loti can help:
Loti provides detailed sample templates and builder estimates available in our Learning Hub area to assist you.
Wrap-Up: Smart Budgeting Leads to Successful Rebuilds
The key to a successful rebuild is starting with a realistic, insurance-driven budget. Keep your rebuild aligned with insurance coverage limits, engage a builder early, and carefully assess any additional costs or upgrades.
By staying informed and strategic, you’ll minimize stress, control costs, and ensure your new home meets your family’s needs without jeopardizing your financial stability.