How Does Inflation Impact My Homeowners Insurance?

inflation of home insurance costs

The recent spike in inflation affects nearly every aspect of life, including insurance costs. But inflation can also affect how well your home is protected against common losses, such as fires, burst pipes, and other risks covered by a standard home insurance policy.

Recent reports put the 2021 consumer price index (CPI) 6.2 percent higher compared to 2020. However, the CPI figures published by the Bureau of Labor Statistics (BLS) don’t always tell the whole story of how inflation affects U.S. households. The BLS number tracks the cost of a basket of goods and services used by most families. But the figure omits several key categories, such as the cost of housing for those households.

U.S. home prices rose nearly 20 percent in 2021, with some in-demand areas seeing even more significant increases. This average increase far outpaces the rise in core prices and could mean many homeowners don’t have enough home insurance coverage. Fannie Mae predicts an increase of about 8 percent for home prices for 2022, signaling an increase closer to this year’s CPI increase.

But there’s still another piece of the puzzle to consider beyond the cost to a buy a home.

Insured Value for Homes

Housing prices grab all the attention in news headlines, but your home’s insured value reflects the cost of rebuilding rather than your home’s market value.

When you purchase home insurance, you choose an insured value based on the cost of rebuilding your home in the same location. Most insurers use specialized software to calculate the cost of rebuilding based on square footage and distinctive home features as well as current labor and material costs in your area.

Over time, the cost of rebuilding your home changes, often leaving homeowners without enough coverage. Insurance options like inflation guard or extended replacement cost coverage can help close the coverage gap or prevent underinsured losses in many cases.

You know market values go up, down, and sideways if you’ve owned your home for a while. But the cost of rebuilding your home is what your policy really protects. That cost changes, usually rising at a predictable pace over time. In times of higher inflation, however, the cost of rebuilding can increase rapidly, possibly leaving your home with less coverage than you need.

insurance increase for construction

Construction and Labor Cost Increases

Lumber costs are also up considerably since the start of the pandemic, spiking to an all-time high in May of 2021. Lumber prices have fallen since reaching a peak, but today’s lower prices are still considerably higher than a year ago.

Similarly, wholesale prices for other home building supplies, including windows, roofing tiles, and doors, increased an average of over 20 percent in the past year. In prior years, the cost of these items rarely increased by more than a few percent.

The cost of building materials illustrates one area of concern for homeowners. Labor costs represent another. Construction wages are up nearly five percent following the pandemic and its resulting labor shortages. In many cases, it’s just (low) supply and (high) demand driving the direction of construction prices. Add it all up, and you’ll find the cost of building or rebuilding a home much more costly than just a year or two ago.

Does My Home Insurance Policy Adjust for Inflation?

Many home insurance companies offer an option that can adjust your coverage to account for increased building costs. This option, often called an inflation guard endorsement, automatically adjusts the insured value of your home if an increase in the construction costs affects the cost of rebuilding your home after a loss.

However, in most cases, inflation guard coverage isn’t always automatic. You may need to select the option for your policy. This means many homes might be underinsured based on the sudden increase in building costs we’ve witnessed in the past year.

For example, if your home insurance policy protects your home for up to $300,000 but construction costs have risen by 20 percent, the cost of rebuilding after a total loss could reach $360,000.  The numbers only get larger for homes with more square footage or unique features that add to reconstruction costs.

Cost of Inflation Guard Coverage

As the insured value of your home increases, premiums for insuring your home also increase. However, you’ll find the premium increase doesn’t track inflation precisely. Instead, you might see an increase in coverage of eight percent, for example, with premiums increasing by only four percent. Again, this is just an example. The actual numbers vary based on several factors, but it’s safe to say that the coverage limit for rebuilding your home and your premium increase don’t move in sync.

Your home insurance premiums also include other coverages, many of which are not affected by an inflation guard endorsement. For instance, the personal liability coverage provided by your home insurance policy is a fixed limit you choose. Inflation guard doesn’t change this limit. So, your premium for this part of your coverage won’t change due to an inflation guard adjustment.

Which parts of your policy benefit from an inflation guard endorsement can vary by insurer. Expect coverage adjustments to your home itself at a minimum. However, some insurers in some states may also offer inflation guard coverage for other parts of your policy, such as personal property as well as other structures on your property.

Your licensed insurance advisor can provide details on the cost and scope of available inflation guard endorsements as well as other strategies to better protect the investment you’ve made in your home.

Homeowners insurance policies typically renew annually, so a policy with an inflation guard endorsement adjusts your coverage at renewal to keep pace with inflation over the past year.

preventing home insurance costs inflation

Other Options to Protect Your Home

Inflation guard offers a powerful solution to help keep your home insured against the unexpected. There are also other options you can consider. Some insurers offer additional ways to protect your home even if construction or repair costs change suddenly.

  • Extended replacement cost coverage: With extended replacement cost, your policy can increase coverage for your home by a fixed percentage. As an example, some policies may offer an extra 25 percent over your existing coverage limit. Using this example, if your home is insured for $400,000, but your policy offers 25 percent extended replacement cost coverage, your actual coverage limit can reach up to $500,000.
  • Guaranteed replacement cost coverage: Like extended replacement cost coverage, guaranteed replacement cost coverage can expand the coverage limit for repairing or rebuilding your home. However, rather than using a fixed percentage to increase your limit, guaranteed replacement cost coverage removes the restriction. If your home is insured for $400,000 but will cost $600,000 to rebuild, your policy with guaranteed replacement cost coverage can cover the difference.

High Value Home Insurance Policy and Guaranteed Replacement Cost Coverage

While there are many differences between a standard home insurance policy and a high value home insurance policy, perhaps that biggest difference is that a high value home insurance policy includes guaranteed replacement cost for dwelling coverage. By contrast, a standard home insurance policy doesn’t offer this option.

Guaranteed replacement cost coverage offers a powerful way to insure against unexpected losses coupled with higher-than-expected rebuilding costs that are the result of inflation.

Speak to Our Team of Licensed Insurance Advisors to Review Your Coverage Options

We recommend a policy review once every 12 to 18 months. A periodic insurance review offers the opportunity to fine-tune your coverage and adjust for changes that occurred since your last review. Often, an insurance review also uncovers some new ways to reduce premiums.

Most importantly, an insurance review provides you with the knowledge you need to make an informed decision and choose the best ways to protect your home and family. The team of state licensed insurance advisors at Coastal Insurance Solutions can review your current policy, make recommendations, and help you compare customized quotes from the leading insurers to fit your unique needs.

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About the Author

David W. Clausen is the CEO of Coastal Insurance Solutions. With over 20 years' experience and over 1 billion insured, David and Coastal Insurance Solutions are the recognized leaders in high net worth insurance. For the fourth consecutive year, David Clausen has been awarded Top Producer by Insurance Business America and the 2023 Agents of The Year by Insurance Journal. David is a trusted high net worth insurance expert who’s published more than 200 articles. His articles & press releases have generated over 500K pageviews and has been featured on blogs such as Google News, Yahoo Finance, CNBC, Market Watch, Fox, The New York Times, etc. David founded Coastal Insurance Solutions in 2001 after earning a BBA from the State University of New York College at Oswego.

IBA's Top Retail Broker 2023
Digital badge for the 2023 Insurance Agents of the Year Award, featuring intricate design elements that symbolize excellence and achievement in the insurance industry.
IBA's Top Retail Broker 2023
Digital badge for the 2023 Insurance Agents of the Year Award, featuring intricate design elements that symbolize excellence and achievement in the insurance industry.

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