Home insurance coverage needs to change with the times—even if you don’t make any upgrades or renovations to a house.
As costs rise, your homeowners coverage needs to keep pace. If it doesn’t, you’ll end up underinsured, which can be a very costly situation. To account for this, the best homeowners insurance companies regularly provide what’s known as an “inflation guard.”
Inflation Guard for Home Insurance Explained
Your home insurance company will likely automatically adjust your coverage amount at each renewal time in order to keep up with rising costs. They can predict for you how much your coverage needs to rise for the year in order to keep pace with rising costs such as construction. (Vendors such as CoreLogic provide these predictions.) Typical inflation adjustments are usually 2% to 4% annually.
A standard homeowners insurance policy includes multiple coverage types that might need to keep pace with inflation:
- Dwelling coverage for your house structure
- Contents coverage for your possessions
- Other structures coverage for items such as sheds and fences
- Additional living expenses coverage if you can’t live at home due to damage
Exactly what coverage does inflation guard apply to? In our analysis of company filings made to state insurance departments, we found that some insurers apply it only to dwelling coverage. Others apply it to dwelling, contents and other structures. And still others apply it to all four coverage sections listed above.
As inflation adjustments are applied, your home insurance premium will also go up, but not by the same percentage. For example, a state insurance filing by The Hartford shows that coverage can increase 4%, 6% or 8% and premiums will go up by 2%, 3% and 4%, respectively.
Other Ways to Increase Home Insurance Coverage
While you want your home insurance policy to keep pace with rebuilding costs at every renewal time, costs can rise suddenly and unexpectedly. Some home insurance companies offer ways to make sure your coverage can ride a spike of increased construction costs. This is valuable in situations where local construction costs have recently risen, such as after a widespread disaster like a tornado when demand for construction booms.
Extended and guaranteed replacement cost coverage will adjust upward when needed:
- Extended replacement coverage will add a certain percentage more to your dwelling coverage if the amount stated in your policy turns out to be insufficient. For example, it might provide up to 25% more dwelling coverage.
- Guaranteed replacement cost will pay any cost to rebuild your house, with no cap.
Not all insurers offer extended or guaranteed replacement cost.
If you do renovations or other improvements to your house, don’t assume that your company’s inflation guard will suffice to raise your coverage limits. You still want to ensure that the stated coverage limits in the policy cover 100% of what it would cost to replace your house and belongings. Let your insurer know if you’ve made improvements that require an increase in home insurance coverage.
