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. However, inflation can also affect your homeowners insurance coverage adversely. Your home insurance coverage doesn’t increase as the value of your home does, which could leave you drastically underinsured if anything were to happen to your home. Therefore it’s a good idea to work with your insurance agent to continually update your coverage so it’s in line with your current property value. Fortunately, most insurance companies offer an endorsement, known as inflation guard coverage, that won’t leave you stranded.
What Is Inflation Guard Coverage?
Although the median home purchase price has declined in many places, the cost of rebuilding a home has not. In fact, there are homes on the market that are selling for less than what it cost to build them. If you insure your home for the price you purchased it for, instead of the cost to rebuild it, then you can leave yourself drastically under insured. Over time the value of your property will change due to inflation, which could leave a gap between your coverage and the rebuild cost of your home. That’s where inflation guard coverage comes in.
Inflation guard coverage is an optional endorsement that protects the rebuild cost of your home. It automatically increases the amount of insurance on your home a certain percentage each year to account for the disparity caused by inflation. It’s 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.
How Much Does it Cost?
Inflation guard coverage is typically built into the base rate for the premium. 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. However, if 100% of your home is covered then some insurance companies may pay for the total replacement of your home even if it exceeds your coverage amount.
In some cases inflation guard coverage is mandatory for policies with replacement cost coverage that have combined limits of liability of less than $1.5 million. 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. 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.