Sure you have homeowner’s insurance, but do you have enough? Inflation, rising construction costs, and home improvements may leave you underinsured.
Standard Homeowners Insurance: The Basics
Standard homeowners insurance includes four essential types of coverage.
1. The Structure of Your Home (Dwelling Coverage)
2. Your Personal Belongings
3. Liability Protection
4. Additional Living Expenses
To determine how much dwelling coverage you need, Insurance companies use this standard equation (among other things): you home’s square footage x price per square foot to build in your area. The total is your replacement cost.
If you bought your home 10 years ago, or even pre-pandemic, and have not updated your homeowner's insurance policy, it’s likely that you’re underinsured. So what can you do?
What To Do If Your Home is Underinsured
All over the country, the cost of building materials has increased. According to the National Association of Homebuilders, “building materials prices are up 19.2% year over year and have risen 35.6% since the start of the pandemic.”
There are a few ways to deal with these rising costs.
1. Increase your Dwelling Coverage
If you think your home is underinsured you can submit a request for a review of your policy to your insurance underwriter.
Do your research and understand the square footage of your home and local construction costs. Use this information to double-check your insurance company’s calculations and negotiate if needed.
2. Consider Adding an Inflation Guard Clause
An inflation guard clause is a win-win for both insurance providers and policyholders. This clause sets an automatic increase in your coverage based on a specified percentage over a specified period of time.
This clause guarantees providers have enough money to pay for losses and it ensures policyholders have protection against rising construction costs and inflation.
3. Get a Guaranteed Replacement Cost Policy
You may be able to add a guaranteed replacement cost policy to your standard homeowner's insurance. This policy guarantees the cost to rebuild or repair your home will be paid if it’s damaged due to a covered loss.
This amount will be covered even if it exceeds your policy limits. You can expect to pay 5-10% of your total policy premium for this add-on.
Kelly Boenzi of the Zimmerman Ryan + Boenzi Group suggests checking your dwelling coverage annually, “Doing a quick check to see how construction costs compare to previous years is a good starting point to make sure you’re not under-insured.”
