(NerdWallet) – The cost of building homes is skyrocketing due to inflation, which could spell trouble for homeowners. The rising cost of lumber and other building materials, coupled with ongoing supply chain issues and labor shortages, could leave many homeowners underinsured if they have to rebuild after a insurance claim covered.
In the event of a disaster, homeowners without sufficient coverage could find themselves dipping into their wallets to cover the shortfall. Now is the time to make sure you have enough insurance to pay the cost of what it would take to rebuild your home, also known as the replacement cost. Here’s what you need to know.
Know the replacement cost of your home
Insurers use replacement cost calculators to determine the amount of housing coverage needed to rebuild your home. Information about your home, such as its square footage, building materials, and year it was built, are all incorporated into the estimated replacement cost.
You can also take steps to determine the replacement cost of your home yourself. One method is to multiply the square footage of your home by the current construction cost per square foot in your area, Alan Himmel, a Florida public insurance expert, said by email. “You can get an idea of construction costs per square foot by calling your local builders association, an insurance agent, or even… contractors.” Most estimates range from $100 to $200 per square foot, according to HomeAdvisor.
You can also hire a contractor to provide a construction estimate, or have an independent insurance agency draw multiple home insurance quotes to get an idea of what each insurer estimates it will cost to rebuild your home. .
Be sure to check your policy’s declaration page to see if you are covered for replacement cost or actual cash value, especially when it comes to your personal property. Replacement cost coverage pays to repair your home or replace your belongings up to your coverage limits, regardless of depreciation or loss in value over time. This means that your insurance company will pay to rebuild your home to the condition it was in before the claim, and replace your personal property with new items, such as paying for a new laptop, regardless of the depreciated value of the one who was lost.
Meanwhile, the actual cash value takes depreciation into account and will likely mean you’ll have to pay the difference between what your policy covers and the cost of fully replacing your belongings. For example, if your sofa is lost in an indoor fire, your insurer will only pay what the sofa was worth when it was destroyed, not the amount it would cost to replace it with a new one.
Consider extended or warranty replacement cost coverage
Although you can figure out how much it would cost to rebuild your home today, it’s hard to predict construction costs in the future. Even a catastrophic storm could dramatically increase the cost of rebuilding in your area overnight.
Extended replacement cost coverage can be added to a home insurance policy to help offset these uncertainties. This coverage will pay a higher percentage of your home’s coverage limit if that amount is not enough to completely rebuild. For example, if your policy’s home coverage is $100,000 and you have 25% extended replacement cost coverage, your insurer will pay to rebuild your home up to $125,000.
If you want to be sure that your insurer will cover the full cost of rebuilding your home, regardless of the increase in construction costs, consider guaranteed replacement cost. “The most confident I’ve ever been when selling a policy is when the client has a guaranteed replacement value endorsement,” says Peter Conte, an independent insurance agent in New York. “They can sleep better because, the time of a complaint, they know that they recover their house.”
Guaranteed replacement coverage usually comes with a higher premium. It may not be available from all insurance companies and may not cover older homes.
Check other coverage options
Many home insurance policies come with inflation protection, which can offset the possibility of being underinsured due to expected increases in inflation. Inflation protection will automatically increase your coverage limits to account for inflation when your policy renews.
Your premium may increase due to inflation protection, but don’t lower your coverage limits just to save on home insurance. “Inflation protection is actually there to help you stay in line with the inflation rate of the US dollar,” says Conte.
If you live in an older home, check your policy for ordinance or statute coverage. In the event of a covered claim, this coverage will pay for the cost of complying with current building codes during reconstruction. Without it, you’ll likely have to pay out of pocket for any work done to meet building codes, even if you have guaranteed replacement cost coverage.
If you’re still worried about being underinsured, talk to your insurance company or agent, as they’re best equipped to break down your policy, including what’s covered and what’s not. . Be sure to keep them informed of any changes you make to your home, such as upgrades or renovations, so they can increase your coverage limits accordingly.
