The inflation rate in the United States is nearly 10%, and it is the highest it has been in over 40 years. While it is obvious how inflation has affected gas prices, what may be less obvious is how inflation can affect your coverage amounts. Not having adequate coverage during these uncertain times could hurt a lot more than those trips to the gas pump.
Why Does Inflation Affect My Policy?
Policies often state an amount of coverage in the event of a loss. For instance, if your home is worth $400,000, and it was totally destroyed, then the insurance company would provide $400,000 to rebuild.
But this assumes that the price of materials and labor is the same now as it was when you took out the policy. It does not take an economics professor to realize that those amounts may not be identical given the inflation rate.
How Does Inflation Affect My Policy?
There are two main reasons that your coverage may no longer be adequate: rising materials costs and labor shortages.
Materials cost more than ever. The price of lumber nearly doubled. That means putting in a hardwood floor in 2020 cost roughly half what it would cost today. Materials are in short supply, meaning that the prices are up.
Labor is in short supply. Yes, those staffing problems that are seemingly everywhere also exist in construction. There are not enough people to do the work, and those that are working are getting increased pay for attraction and retention. Those costs are passed on, and eventually, those costs could be passed onto you.
Am I Covered?
Many insurers account for inflation by increasing homeowners’ rates to make up for these shortages that are due to inflation. This is why you may realize that your rates have increased. While this is frustrating, it ultimately protects you. In the event that your home was destroyed, the insurance company has adequate funds to rebuild the entire house–not just 75% of it.
Can I Do Anything Else to Protect Myself?
Yes. There are a couple of recommendations: purchase inflation guard insurance or extended replacement cost coverage.
What is Inflation Guard Insurance?
It does exactly what it sounds like–guards against inflation. This insurance automatically increases every year, which will make up the difference in the coverage provided and the actual amount of property replacement. One of the things to watch in purchasing this is to be clear on what is covered. Some policies will only cover your dwelling and will exclude, for instance, a detached garage on the property where your possessions are stored.
What is Extended Replacement Cost Coverage?
This option allows you to purchase additional coverage for a certain percentage of the policy limit amount. Having this will allow you to have full replacement value in the event that your home is destroyed.
If your home is worth $400,000, you may be able to purchase a 25% extended replacement cost coverage endorsement. This would mean that you have $480,000 to help rebuild the home. If the cost of rebuilding is still more, you would have to fill that gap, but this extra money will go a long way to a rebuild.
Speak to a Property Damage Attorney Today
Inflation has caused everyone’s costs to go up, and insurance costs are no exception. Still, it is better to pay a bit more now than to be without complete coverage and pay more later. Contact a property damage attorney at 954-915-7405 to review your options.