Home Values Are Rising: How to Adjust Homeowners Insurance to Match
Home values have risen sharply in recent years. However, many homeowners haven’t adjusted their coverage.In addition to higher home values, we’re also seeing higher construction and repair costs. Lumber and other building materials are at record highs. It’s costing more to build and repair than ever before.
For all of these reasons and more, it may be a good time to adjust your homeowners insurance. Keep reading to discover how to adjust your homeowners insurance to match today’s conditions.
Check Your Policy for Coverages and Limits
First, it’s important to check your homeowners insurance policy to understand what’s covered – and how it’s covered.
A standard homeowners insurance policy covers the replacement cost of structural damage. The insurance company would pay to replace damaged components of your home after a loss.
A replacement cost policy is ideal. However, many homeowners carry actual cash value policies. These policies are cheaper, but they limit compensation significantly after a loss. A replacement cost policy repairs your home with parts of a similar kind and quality. An actual cash value policy compensates you based on the value of your home minus depreciation for the age and condition of the home.
You should also check your Declarations Page for additional coverages and limits. Your declarations page shows how much your home insurance company will cover until your home is declared a total loss.
You May Be Underinsured
Many homeowners are underinsured.
The number of underinsured homeowners is even higher today because home values and construction costs have risen sharply.
It may have cost $400,000 to build your home, but it might cost $600,000 to rebuild your home today – even if your home is just a few years old.
Check your homeowners insurance declarations page to verify your limits. This is the amount your insurer will pay up to when rebuilding your home.
Let’s say your home was worth $300,000 when you bought it. You have a $300,000 homeowners insurance policy. However, your home is now worth $400,000, and you still have the same $300,000 homeowners insurance policy. You are now significantly under-insured. If your home burns to the ground, then you have lost your $400,000 home, but you will only receive a maximum of $300,000 from your insurance company.
Insurance companies adjust insurance to match the value of your home. Insurers check current market conditions and construction costs to ensure you’re adequately covered. However, you may still be under-insured – especially if your insurer doesn’t have complete knowledge of your home and any renovations you have made.
Look for an Inflation Guard
Inflation and other factors have made construction more expensive. Fortunately, some homeowners insurance policies have an inflation guard.
Check your homeowners insurance policy for an inflation guard.
When active, an inflation guard adjusts your limits to match current construction costs in your area. If construction costs have doubled in your area since you purchased your policy, then your homeowners insurance policy will adjust to match these conditions.
If you do not have an inflation guard, then your homeowners insurance policy may not have sufficient coverage to repair or rebuild your home after a loss. You may have had adequate coverage 5 years ago, but conditions have changed and you may need to adjust your policy for adequate coverage.
Not All Homeowners Insure 100% of Their Home
Some homeowners insure 100% of their home’s value, while others do not. It’s a personal preference.
Most homeowners insurance policies do, however, require you to insure your home to at least 80% of its rebuilding cost to obtain a replacement cost settlement.
If you insure your home for less than 80% of its rebuilding cost, then you may receive an actual cash value settlement instead. Some policies even penalize you for each percentage point below the 80% replacement cost.
If you want to save money on homeowners insurance and are willing to take the risk, then you can insure your home for less than it’s worth. It’s a personal preference. However, consider rising home construction costs when calculating your insurance needs. You may think you have enough insurance to rebuild your home after a loss – but with construction costs higher than ever, your policy is leaving you significantly under-insured.
Prepare for Natural Disasters as They Become More Common
As reported by Triple-I, natural disasters have increased in frequency in recent decades. As a homeowner, you have a higher risk of losing your home to floods, wildfires, hurricanes, and other events.
The Atlantic hurricane season, for example, has recently been “well above average.”
Natural disasters are also occurring in wider areas and in more months of the year. Wildfires used to occur during the dry months and latter half of the year in the western United States.
Now, wildfire season never ends and the region is in a multi-decade mega-drought.
For all of these reasons, it’s important to review coverage today before it’s too late. Many people understand the importance of adjusting their insurance limits and read articles like this, yet they never actually adjust their insurance policy. Don’t be like that: take action today before it’s too late.
Other Tips for Insuring Your Home to Its Full Value
Most insurance experts recommend insuring your home to its full value. Although not all homeowners follow this approach, insuring your home to its full value can provide added protection and peace of mind.
Here are other tips for insuring your home to its full value:
Increase Coverage After Renovations: If you recently renovated your home, then your home may be more valuable. A single renovation could add $10,000 to $50,000 of value to your home for example. Contact your insurance agent and inform them of the change to ensure your policy reflects that change.
Buy Replacement or Repair Cost Protection: Replacement or repair cost protection provides more compensation after a loss than actual cash value protection. With actual cash value coverage, your homeowners insurance company will compensate you for your repairs based on the value of your home minus depreciation. Replacement cost coverage can add 25% more value to your claim without significant added cost. Consider switching your homeowners insurance policy to replacement or repair cost protection for added peace of mind.
Review Homeowners Insurance Needs Annually: Take time once a year to review your homeowners insurance needs. Talk to your insurance agent to review your needs and go over any changes. Life changes – like getting married or having a child – can change your insurance needs.
Give Your Insurance Company Detailed and Accurate Information About Your Home: Your home insurance company needs as much data as possible to create an accurate insured value for your home. Make sure your insurance company has extensive information about the size, layout, and unique features of your home.
Request a Component-Based Valuation System: Most insurance companies use software to calculate the value of your home. If you disagree with the insured value of your home, then ask your insurer to use a component-based valuation system. This system considers specific home features and additions from the ground up, pulling data from the construction industry to reflect the latest trends. All insurance companies use this system when calculating property damage replacement costs, and it could change the insured value of your home.
Final Word
A recent survey from the American Property Casualty Insurance Association (APCIA) found approximately 2 out of 3 homeowners lack important additional coverages.
These homeowners don’t have automatic inflation guard, extended replacement cost, or building code/ordinance coverage, for example. All of these coverages could be crucial if you need to make a claim.
Review your homeowners insurance needs to ensure they reflect current market conditions.
Stephanie is a property insurance claim expert with over 20 years of experience working as an insurance adjuster, expert witness, appraiser and umpire. She is passionate about sharing her expertise, knowledge, tips and training to help both property owners and Public Adjusters in their pursuit of effectively managing claims and recovering the claim settlement they deserve after a loss.
