Are you among the 60% of homeowners who are now underinsured due to rising building costs and inflation?
Are you prepared to pay tens of thousands of dollars out-of-pocket to rebuild your home if you suffer from a devastating fire, flood, hurricane, or other natural disasters?
Did you renovate or remodel your home during the pandemic?
Most homeowners haven’t added additional homeowners insurance to their policies to cover these risks, which means they’re underinsured and have failed to account for the following:
- Skyrocketing Construction Costs
- Rising Inflation
- High Interest Rates
- Labor Shortages
- Supply Chain Disruptions
- Increasing Demand
- Climate Change
Unfortunately, these rising risk factors are only projected to continue.
What does it mean to be underinsured?
Simply put, if your home is underinsured, you don’t have enough homeowners insurance coverage to get fully reimbursed to rebuild your home or replace your belongings after a disaster such as a flood, fire, hurricane, or other covered loss.
You’ll have to pay out-of-pocket to cover these costs.
If your coverage limits are too low for any one of the following standard home insurance policies, you may be underinsured:
- Dwelling Coverage
- Coverage for Other Structures
- Personal Property Coverage
- Loss of Use Coverage
- Personal Liability Coverage
The cost to replace your home is based on rebuilding it to its pre-loss condition, not its market value.
For most homeowners—60%–it is now more expensive to rebuild than when you initially purchased your homeowners insurance policy; the insurance coverage that used to protect you probably isn’t enough anymore. Homeowners need to know how to insulate themselves from the rising risk of an underinsurance disaster.
Luckily, this guide will help you navigate the challenging homeowners insurance policy landscape and protect you and your home if the unexpected becomes your reality.
6 Reasons Why Your Homeowners Insurance Premiums are Rising
First, it’s important to understand why home insurance premiums are rising.
In 2022, homeowners in every state witnessed an average increase of 12.1% in home insurance rates. Why did this happen, and why is the trend forecasted to continue through 2023 and beyond?
#1 – Rising home values and construction costs are two of the biggest drivers of increasing premiums in the event of a loss. While there’s no way to predict an unforeseeable event, there are actions you can take to protect yourself, namely reviewing your policy with one of our local agents.
#2 – Inflation continues to be unpredictable, which means homeowners insurance is expected to remain higher than its historical averages, largely due to the continued high prices of construction materials and continuing labor shortages.
#3 – Climate change is another factor. Even insurance companies need to purchase insurance, which is called reinsurance. Reinsurance transfers some risk of insuring their customers to another insurance company, the reinsurer.
Reinsurance is a global market, which means that a natural disaster on the other side of the world can affect rates locally. Insured natural catastrophe losses averaged about $100 billion over the past five years. A stunning 71% of the losses occurred in North America. Natural disasters such as hurricanes, floods, wildfires, and unpredictable weather are adding to the record-setting number of claim payouts and contributing to increasing insurance coverage rates.
To protect themselves against financial losses, reinsurers pass their costs on to insurers in the form of higher premiums … which are then passed on to you, also in the form of higher premiums.
#4 – Older homes may be due for upgrades. Water damage claims are among the most expensive types of home insurance claims. A burst pipe or a leaking roof can cause significant and costly damage. If an inspection reveals that you need a new roof or plumbing work, your rates may increase.
#5 – Attractive Nuisances. Insurance companies consider “attractive nuisances” anything that attracts people onto your property. Common examples of these types of nuisances may include:
- Swimming Pools
- Open Water
- Playground Equipment
- Construction Projects
- Sand or Gravel Pits
- Expensive/Extra Cars
- Old Appliances
Removing these nuisances may help lower your insurance costs.
#6 – Your insurance score? This score represents the statistical likelihood of you having to file a claim. Insurers determine your insurance score by reviewing the following factors, among others:
- Long-Established Credit History
- Many Open Accounts in Good Standing
- No Late Payments
- No Past Due Accounts
- Low Use of Available Credit
Conversely, credit factors that can reduce your insurance score typically include:
- Collection Accounts
- Many Past-Due Payments Owed
- High Use of Available Credit
- Too Many Recent Applications for Credit
4 Types of Homeowners Insurance Coverage
Typically, there are four types of homeowners insurance coverage offered by insurers:
- Actual Cash Value
- Replacement Cost
- Extended Replacement Cost
- Guaranteed Replacement Cost
Each type of home insurance coverage has various ways to get reimbursed if your home is damaged or destroyed.
There are two important reasons why homeowners need to understand what the replacement cost of their home is should disaster strike.
First, it will help you determine what the appropriate insurance coverage limits are for your home. Second, it will ensure that you get sufficiently reimbursed if you have to file a claim.
#1 – Actual Cash Value
Actual Cash Value accounts for depreciation before it pays out reimbursement. It typically provides a low level of protection and may result in high out-of-pocket expenses.
#2 – Replacement Cost
Replacement Cost is a step up from Actual Cash Value. It doesn’t factor in depreciation and typically covers your home and the property inside your home. It will repair your home with similar materials to what existed before the damage was incurred.
#3 – Extended Replacement Cost
What if the coverage amount on your home insurance policy doesn’t cover your rebuilding costs?
Remember that over 60% of homeowners are now underinsured due to changes in the insurance market.
Extended Replacement Cost goes even further than either Replacement Cost or Actual Cash Value. Your home coverage is still set at a specific amount, but it adds extra protection as a percentage over your coverage amount.
For example, if your home costs $300,000 to rebuild, but your Extended Replacement Cost policy provides an extra 20% of coverage, you would be covered for up to an additional $60,000.
However, not all insurance companies offer this type of coverage.
#4 – Guaranteed Replacement Cost
Guaranteed Replacement Cost, often considered the “gold standard” of home insurance coverage, covers rebuilding costs that may exceed your coverage amount. It insulates you from having to pay out-of-pocket for replacement costs. It is designed to cover a property wholly and completely.
4 Ways to Calculate the Replacement Cost of Your Home
Let’s imagine for a moment that your home has suffered a disaster. You need to know what it’s worth to ensure you get adequately reimbursed.
But what impacts the replacement cost of your home? Some of the most common factors are:
- Cost of Building Materials
- Square Footage
- Number of Rooms, Bathrooms & Bedrooms
- Interior Features (Cabinetry, Fixtures, Built-in Appliances, etc.)
- Finished Spaces like Basements or Attics
- Roof Type
- Foundation Type
- Age of Home
That said, how can you calculate the replacement cost of your home?
#1 – Cost x Square Footage = Estimated Replacement Cost
The simplest way to calculate the cost of rebuilding your home is with the following formula:
- Determine the local rebuild cost for your area.
- Multiply that cost by the square footage of your home.
For example, the cost to build a 2,000-square-foot home in Vermont is roughly $225-$400 per square foot, so that the price range might look like:
- Lowest Rebuild Cost: 2,000 square feet X $225 = $450,000
- Highest Rebuild Cost: 2,000 square feet X $400 = $800,000
Your replacement cost would be between $450,000 and $800,000; however, costs will be influenced by variables such as:
- Property Type
- Labor Costs
- Material Costs
#2 – Online Replacement Calculators
Online replacement calculators like these from Policy Genius can help you determine what the replacement cost of your home might be, as well helping to determine the following:
- Value of Personal Belongings
- Value of Assets
- Coverage Amount Needed
#3 – Insurance Provider Estimates
Your homeowners insurance policy includes your insurer’s replacement cost estimate, which accounts for unforeseen disasters. Insurers have tools and methodologies for estimating your home’s replacement cost value, which accounts for information in your insurance application, property data, and third-party data.
#4 – Get a Contractor or Appraiser Quote
This route is perhaps the most accurate one to choose for many homeowners. A licensed, professional building contractor can assess what goes into a rebuild in great detail. They should be able to assess the inside and outside of your home thoroughly. However, it’s generally the most expensive option.
How to Be Financially Prepared for an Underinsured Disaster
A recent survey by the American Property Casualty Insurance Association (APCIA) found that most insured homeowners—about 60%–are at risk of being underinsured.
Increased building costs, reconstruction delays, and high inflation have created a situation where many policyholders will be underinsured if catastrophe strikes.
So, how can you be financially prepared for a disaster that puts you out of your home?
These key insurance coverage features can help protect you:
- Annual Inflation Adjustment automatically adjusts your coverage when you renew to keep pace with rising costs.
- Extended Replacement Cost will increase the coverage to rebuild your home when building costs rise after a natural disaster.
- Building Code/Ordinance Coverage increases coverage to comply with new building codes or green energy ordinances when building costs rise after a natural disaster.
- Loss of Use Coverage helps pay for living expenses if you have to be out of your home during its repair.
In addition, homeowners can take the following actions to ensure they’re covered:
- Conduct an annual review of your insurance policy with a local insurance expert.
- Update your policy annually to ensure you have enough coverage.
- Create a home inventory to ensure you’ll be reimbursed for assets inside your home. Update this document annually.
Is your home underinsured?
Do you have the coverage you need?
Contact us or find an agent near you today to learn how we can customize your home insurance policies to meet your needs.
*Disclaimer: We offer content for informational purposes; Co-Op Co-operative Insurance Companies may not provide all the services or products listed here. Please contact your local agent to learn more about how we can help with your insurance needs.
American Property Casualty Insurance Association (APCIA). New Survey Finds Majority of Insured Homeowners at Risk of Being Underinsured Amid High Inflation & Increased Building Costs.
APCIA Underinsurance Infographic. Majority of Insured Homeowners at Risk of Being Underinsured Amid High Inflation & Increased Building Costs.
Columbia University – Columbia Climate School. With Climate Impacts Growing, Insurance Companies Face Big Challenges.
Forbes. Why You Want Home Insurance With Extended Or Guaranteed Replacement Cost.
Houzeo.com. How Much Does it Cost to Build a House in Vermont?
Moody’s. Reinsurers defend against rising tide of natural catastrophe losses, for now.
Policy Genius. Replacement cost estimator: How to calculate home replacement costs.
Policy Genius. Why did my homeowners insurance go up in 2023?