Every year you get your homeowners renewal policy, you should notice a slight increase in your dwelling coverage amount. This coverage increase is because almost every homeowners policy has a built in inflation guard that increases your dwelling coverage a fixed percentage to keep up with the natural changes in the economy.
However, there are times when the inflation guard gets ahead of the economy’s inflation or behind the economy’s inflation. If the inflation guard increases too quickly or not quick enough, then you’re left with a dwelling coverage limit that is either below or above what you actually need. The Covid-19 pandemic is a great example of this. The pandemic has drastically impacted our economy, causing the prices on everything to increase, including the price of materials needed to build your home.
Replacement Cost: the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose.
https://www.eqgroup.com/acv_explained/
A lot of our clients are seeing the replacement cost of their home increase beyond the automatic increase that occurs with the built in inflation guard. In these cases, if we do not manually submit an endorsement requesting the dwelling coverage limit be increased, the client would be under insured. Being under insured in the event of a loss can be devastating to a homeowner.
On the other end of the spectrum, you can end up being over insured due to the built in inflation guard increasing your dwelling coverage limit faster than the economy’s inflation increasing. Being over insured will mean you’re paying for a coverage amount you won’t receive in the event of a loss.
Just because you insure a $250,000 home with a replacement cost of $350,000 does not mean you will actually get $350,000 in the event of a total loss claim. The purpose of your insurance policy is to get you back to where you were before the claim happened. That means if your $250,000 house is a total loss, but is insured with a replacement cost of $350,000, your insurance company will replace your home with a similar $250,000 home.
This is why we always recommend checking your renewal policy and reaching out with any questions you may have, including if your home’s coverage amount is still accurate. Before submitting an endorsement request to increase or decrease the dwelling coverage limit, we always run a new replacement cost estimator to verify the replacement cost amount needed.
To learn more about your homeowners insurance policy check out our Homeowners Insurance 101 post.
The post explains the importance and benefits of having an inflation guard endorsement added to a homeowner’s insurance policy. By reading this informative article, homeowners can understand how this endorsement can help protect their homes and assets from the impact of inflation over time, ensuring they have adequate coverage even as construction costs and property values change.
Excellent Blog, Good explanation on Safeguarding home’s value against rising costs, ensuring continuous protection.
The first thing is to take out good home insurance that fits your needs and lifestyle so that, in case of emergencies, you do not suffer financially.