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Understanding Inflation Guard Coverage For Your Home Owners Insurance
2010-08-17
When your home appreciates in value you automatically consider it to be a better investment because it is worth more than what you paid for it. Beware that inflation can also affect your home owners insurance coverage adversely. Inflation guard insurance automatically increases the amount of insurance on your home periodically to guard against your home being underinsured due to inflation. It is true that inflation will drive up market values, but an across-the-board increase in values may or may not affect your replacement cost, which is the determining factor insurance companies use to replace all or part of your home in case of accidents or natural disasters. Replacement cost may be higher or lower than market value or actual cash value, which could affect your bank account.
Most insurance companies will require you to pay a premium of 80 to 90 percent of the replacement cost of your home in order to fully replace all or part of your home if it is damaged or destroyed. If you are paying less than 80 percent of the replacement cost, your home owners insurance company may not be obligated to cover all of the costs of replacement, which means that you have to cover those costs out of pocket. That is why inflation guard insurance is important. Inflation is a double-edge sword. It raises the value of homes, but it raises building costs as well.
For example, assume you own a custom home in an area where most of the homes are newer tract homes, which could dramatically affect the market value or your home because you are lumped in with the home values of the majority. But the cost of replacing your custom home could be quite a bit more than the tract homes because the building materials that went into your home cost more than the materials for the tract homes. Also, inflation has increased the cost of materials and labor to build all homes.
It is true that inflation may have driven up the home values in your area and made your home more valuable, but it is also possible that your home may be underinsured because of the inflation. Inflation guard insurance gives you added replacement cost dollars in this case.
Some inflation guard insurance provisions allow for a 2-percent increase in the value of your insurance per quarter, but it is important to ask your agent what rate your company will pay and whether or not that rate is negotiable. Even if you have inflation guard insurance it is important to check with your agent from time to time to see if inflation is adversely affecting your replacement cost.