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How inflation affects your home insurance

How inflation affects your home insurance

Yes, Inflation is Even Affecting Your Home Insurance

Between gas prices, groceries, and just about everything else the soaring cost of goods has probably caused you to rethink some of your spending habits. You’re probably even wondering if your insurance will be exempt from the increase; the unfortunate answer is probably not.

We often get asked by our customers why their premiums are going up even though they haven’t ever had a claim, usually the answer is inflation.

How does inflation affect your insurance? It's not a simple answer of prices go up so your premium must go up. 

One of the biggest factors in your premium is your RCV (Replacement Cost Value). It factors in all of the characteristics of your home to calculate how much it would take to rebuild your home with the same unique features. If the costs of these materials go up, so does the cost to rebuild your home.  In general, the Replacement Cost Value is similar to the appraisal or purchase price, but as we’ve seen in Florida, the later two valuations can be exuberant compared to the insurance valuation. Having your RCV be lower than your appraisal is generally a way to have a bit lower of a premium, but can prove disastrous if there is too much of a discrepancy between the two. If your home’s RCV is not at least 80%, the insurance company is not obligated to pay the full amount for a claim to your home.

Hot real estate markets like here in Northwest Florida have been increasing almost 25% per year for the last few years causing home values to soar above that Emerald Coast. Home values for everyone have increased, but I bet your Replacement Cost Value hasn’t been adjusted has it? No one wants to pay more for their insurance premium, but by keeping it adequately insured, you’ll avoid harsh rate increases or insufficiently paid claims.

One great product that home insurance companies usually have that will help bridge the gap between your RCV and the market’s valuation of your home, is inflation guard. Inflation Guard is the automatic annual increase in your property’s valuation and premium. It’s like the set it and forget it of the home insurance policy. The slight increase may sound a bit shady, but in reality, it helps buffer your premium against sudden and steep rate increases.

So the two simple things you can do today to make sure you aren’t hit with soaring premium increases in the future:

  1. Make sure your Replacement Cost Value is up to date with market trends for your area. Your insurance agent should be able to do this through company website and their own software. Be sure to tell them about any upgrades to your home like flooring, countertops, or custom built ins.
  2. Add inflation guard to your policy