Homeowners insurance policies are affected by inflation too. Increases in material and labor costs combined with supply shortages create huge gaps in many policies when it comes to rebuilding your home after a loss.
Here at Bowthorpe & Associates Insurance Producers, we recommend policy reviews to ensure adequate coverage.
Why Home Insurance Costs More to Rebuild Today
Due to inflation and climbing building costs, nearly everything needed to rebuild your home is more expensive. Materials such as lumber, roofs, electrical, plumbing supplies, fixtures, paint – you name it. All of it costs more money to replace today than it would have just 5 years ago.
Skilled construction labor is also more expensive as contractors are busier than ever.
Insurance carriers revise their recommended coverage amounts and premiums to keep pace with rising replacement costs. When it costs more to rebuild your home, insurance carriers must recommend higher coverage limits to prevent you from being underinsured.
That means if costs go up, your dwelling coverage could too…even if you never file a claim.
Replacement Cost Versus Market Value
Coverage amounts are frequently confused with market value. Market value is how much your home would sell for today. Replacement cost is how much it would cost to rebuild it as it was before a loss.
Just because market values have not increased dramatically in recent years does not mean your home could not cost more to rebuild.
Why Outdated Coverage Limits Are a Problem
It’s fairly common for homeowners to believe that once a policy is purchased it will always cover you. Although many insurance policies come with something called inflation guard which helps your policy keep pace with rising costs – even that may not be enough.
If your policy was purchased 5, 7, or even 10 years ago, it’s very possible that your coverage no longer matches your needs.
For instance, your home may have been insured for $350,000 years ago. With the rising costs of materials and labor, it could cost you $450,000 or more today to rebuild.
That leaves you financially vulnerable if you experience a total loss from a fire, storm or other covered disaster.
Building Costs Are On The Rise
Construction costs play a huge role in insurance premiums and recommended coverage amounts.
Here are some of the reasons rebuilding costs continue to rise:
- Cost of materials such as lumber and steel
- Shortages of skilled trades labor
- Lead times for materials and supplies
- Rising permit and inspection costs
- National demand after major catastrophes
When natural disasters cause large amounts of property damage in a short period of time, there is suddenly a massive demand for rebuilding. Suddenly contractors are booked solid, prices rise, and availability of materials plummets.
Insurance carriers take these scenarios into account with both coverage and cost.
Inflation Guard
Many insurance companies offer what is called inflation guard on homeowner policies. Inflation guard automatically increases your dwelling coverage each year by a certain percent.
In most cases this is between 4% – 8%. In some instances where construction costs skyrocket inflation guard increases may not be high enough.
Annual policy reviews are still recommended.
Annual Policy Review Importance
Policies should be reviewed each year to help ensure you have enough insurance to cover your home if a total loss were to occur. Anytime you make changes to your home, you should review your coverage too.
Things like kitchen and bathroom remodels, room additions, or upgrading your roof are just a few ways that your replacement cost could increase.
Upgrading to hardwood floors instead of carpet, high-end appliances, or towel racks may seem insignificant but can add up.
Our goal at Bowthorpe & Associates Insurance Producers is to help you identify any gaps in coverage before you need to file a claim.
Don’t Forget About Personal Property Coverage
Believe it or not inflation has increased the cost to replace your personal property too. Whether it’s furniture, electronics, appliances or clothes – they now cost more to replace.
The standard personal property limits may not provide you with enough coverage. If you own high-end jewelry, collectibles, art, or luxury watches you will likely need to add a scheduled coverage endorsement.
What You Can Do About Rising Home Insurance Costs
If you discover your home is underinsured, you’ll likely see your premium increase as you correct the issue. However, that doesn’t mean you can’t take steps to save money on your premium.
Look into these options to lower your costs:
- Increase your deductible
- Bundle your home and auto policies
- Install a security system
- Install a smart home system
- Keep your roof up to date
- Ask your agent about discounts
Remember you shouldn’t skimp on coverage to save money. Don’t leave yourself exposed.
Final Takeaway
With prices continuing to rise for construction materials and skilled labor, insurance policies need to keep up. In addition to rising material costs, labor shortages and delays due to supply issues continue to drive up replacement costs.
If you haven’t reviewed your homeowners policy in the last couple of years, now would be a great time to do so. Bowthorpe & Associates Insurance Producers are here to help you determine if you have enough coverage or if there are changes we can make to help lower your premium.
Give us a call today to review your policy and see where we can help.
Frequently Asked Questions
Can inflation increase my home insurance rates?
Inflation can increase your rates by increasing the limits on your policy. More coverage = higher premium.
What does insurance replacement cost mean?
Replacement cost means it would cost to rebuild your home as it was prior to a loss using today’s prices for labor and materials. It does not include the market value of your home.
What happens if you are underinsured on your home insurance?
If you are underinsured and experience a total loss, you will be required to pay the difference out of pocket.
Do insurance companies adjust for inflation?
Some companies offer what is called inflation guard which automatically adjusts your dwelling coverage each year by a certain percent. However, that may not be enough to keep up with rising costs.
How often should I review my homeowners insurance coverage?
We recommend reviewing your policy annually as well as any time you make a major change to your home.