Anyone who has recently checked on local real estate listings will have seen the huge jump in prices from last year. In our Jacksonville area, home values have increased by about 14% year over year. In other locations, there have been even higher increases.
We also saw a year in which inflation topped 6%. Since most homeowner policies are pegged to inflation and your coverage limits will be adjusted upwards, your premium payment will likely go up as well.As a result of significant real estate value increases and inflation, you should be asking, “is my coverage enough?” It may be a good idea to take a comprehensive look at your policy, what it covers, and how much you pay for it.
The Basics and Beyond
Insurers offer a few different options for coverage. Does your current insurance provide the kind of insurance you would like? Below is a brief description of some of your options. If you want to get more and better coverage, you’ll have to pay more for it. The old adage, “you get what you pay for,” is applicable here.
ACTUAL CASH VALUE
Actual Cash Value policies pay a reimbursement amount that is based on, you guessed it, the actual cash value. That calculation takes depreciation into account. While we typically consider homes as appreciating assets, not depreciating, it is not always the case. Additionally, the value of the home and contents is not necessarily what you can replace it for. Actual cash value is the lowest possible coverage.
Replacement cost is typically better coverage than Actual Cash Value, but it costs more. Replacement Cost policies pay for repairs with similar materials to what was there before any damage, without making any depreciation deduction. Its calculation is based on what it costs to replace, not on its value, likely providing you with better insurance.
EXTENDED REPLACEMENT COST
Extended replacement cost provides even more coverage to absorb a cost spike, such as what can happen after a natural disaster when widespread destruction cause costs to increase dramatically. It’s near impossible to find contractors during those natural disasters, and you probably end up paying more for their services. The extended replacement cost is a homeowners insurance endorsement that can provide 10% to 50% extra coverage. It comes at an increased cost but can be well worth it if you are in an area at risk of natural disasters.
GUARANTEED REPLACEMENT COST
The difference here is the word guaranteed. This coverage provides 100% replacement costs, regardless of how much prices have increased. Beyond providing peace of mind, if you have a high-value home, this coverage may be the way to go, but again, it will be the highest priced.
Covering the Contents
Your belongings are usually covered at about 50% of the amount of your standard dwelling insurance. Of course, if you have items of great value – art, furniture, silver, jewelry, collectibles, or very expensive electronics, you’ll need to have very good files on their value. These should include receipts and photographs and should not be stored in your home. You may also need specific riders for some items.
Home Prices Have Gone Up – and So Has Inflation
Along with the increase in home prices, inflation has risen significantly as well. Many, if not most, policies increase coverage by inflation each year to try to prevent homeowners from being under-insured. However, when inflation is around 6%, and home prices increase approximately 14%, that inflation adjustment may not be enough to cover the recent increase.
The Bottom Line
Speaking from personal experience, I did not feel my coverage limits increased anywhere close to the current home value. I, therefore, talked with my insurance agent and added additional coverage. We highly encourage you to review your policy type, coverage limits and speak with your insurance professional for any needed updates.
Insurance is one of the basics of your financial plan. It can be expensive, and it can feel like a waste to write those premium checks. Everyone hates paying for insurance until you end up needing it. Keeping your policy up to date should be part of the “financial hygiene” your practice regularly.
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