By Jeff Zander, CEO of Zander Insurance
U.S. inflation rates have soared to a record 8.2%, the highest rate the country has seen in over 40 years. While most industries expect to see a proportionate rate of price increases, many people in Nashville have inquired specifically about the immediate and long-term effects on the insurance industry and their costs and coverages.
Both Nashville natives and new arrivals have seen the real estate market surge over the last few years, and homeowners are questioning whether their insurance policies are still adequate based on the impact of inflation and rising building costs.
Do I have enough coverage to rebuild in the event of a claim?
The answer lies in determining the exact replacement cost of your home, which is a challenge that a trusted builder can help solve based on building costs in your neighborhood. When reviewing your policy, understand that there is an important distinction between the “sale price” and the “price to build” from when you originally secured your home insurance.
The sale price of your home is what you paid at market value and includes additional factors such as the price of your land. The estimated price to build is based on the actual cost of building a home of your size with similar finishes and building materials. This can fluctuate based on additions such as outdoor living spaces and finished basements, and it does not include the cost of your land. The estimated price to build gives you a starting point for your home’s replacement cost in the event of a total loss.
What about the increased price of goods since I originally insured my home?
This question comes up regularly for those of us working in the insurance industry. Most insurance policies have built-in protection programs to offset inflated construction and materials costs. Inflation guard protection is an automatic yearly increase to your building coverage limit ranging from 4% to 10%. These increases build on your initial evaluation to keep up with inflation.
The potential risk for Nashville homeowners lies in the method you used to insure your home when you bought it. If your initial replacement cost missed the mark at some level, then the inflation protection will simply keep your original quote up to date as prices rise. In this case, you will still be underinsured.
Is there anything I can do today to ensure I am adequately covered?
The good news is you can speak with your insurance provider about replacement cost endorsements. These policy riders provide additional coverage over the limit listed on your policy in case of a claim.
Two options are:
Extended Replacement Cost
The extended replacement cost option allows you to increase your current replacement cost coverage for your home by 20%, 50% or 100%, building on your home’s initial insured value.
For example, if your home is currently valued at $250,000, and you have a 50% extended replacement cost endorsement, your insurance company will give you an additional $125,000, totaling $375,000 towards your rebuild in the event of a total loss.
Guaranteed Replacement Cost
The guaranteed replacement cost rider is the ideal protection plan for your home, but it may not be offered by all insurance companies. It provides guaranteed replacement, regardless of the cost to rebuild the home, even if it is higher than the limits shown on your policy. For example, if your home value is $250,000 and becomes a total loss, and the cost to rebuild is $400,000, the insurance company will pay the full replacement cost of your home at $400,000.
My strongest recommendation for new and existing homeowners is to promptly connect with your agent to discuss your current policy coverages. Because the cost to rebuild homes has increased substantially in the past two years, it is crucial to ensure your coverage is keeping up with the pace of inflation and the higher cost of building (or rebuilding) a home.
To learn more from an insurance broker, visit zander.com
Jeff Zander has more than 35 years of experience working in the insurance industry, and his knowledge dates back even further. Nashville-based Zander Insurance Group was founded nearly 100 years ago by his great grandfather Herman Zander, and Jeff is CEO of this fourth-generation, family-and-employee-owned business.