Renovated Lately? You Might Need to Rethink Your Home Insurance
High purchase prices are a hallmark of today's housing market. But they aren't the reason you may need to spend more on your home insurance than you did before the pandemic.
Changing home prices actually have surprisingly little effect on the amount of insurance a home needs, according to Richard Lavey, president of Hanover Agency Markets at The Hanover Insurance Group, based in Worcester, Mass.
“If the market value goes up by 40%, it doesn't mean your insurance coverage needs go up by 40%. It could just be the land value, or the demand, or lack of supply in a particular zip code” driving the increase, he says.
What does matter to your insurance, Lavey explains, is whether the cost to replace the home has risen by more than is customary. That’s because your coverage amount is calculated according to how much it would cost to rebuild your home — using the same or similar materials and workmanship — if you were to suffer a total-loss catastrophe such as a fire.
Two factors have caused those costs to rise sharply during the pandemic: pricier construction costs and an explosion in home renovation and expansion.
Here’s how much each may have affected the cost to rebuild your home -- and the possible need to adjust your insurance coverage upwards.
High costs for materials and labor
Most homeowners insurance policies have a provision that automatically adjusts a home’s insured value for inflation — raising it, say, by 3% from year to year. But those standard hikes may not be enough at the moment, given how rebuilding costs have escalated.
“It’s about the supplies, the materials — they've increased considerably because of the pandemic,” says Robin Jaekel, vice president of personal lines at broker Glenn Insurance, based in Absecon and Malaga, N.J.
Earlier this year, it was estimated that then-higher lumber prices could add nearly $36,000 to the cost of building a new home compared with typical years, according to the National Association of Home Builders.
While lumber prices have come down about 70% from the stratospheric levels they hit in early 2021, they are still elevated above pre-pandemic norms — and the prospect of further increases can’t be ruled out if the Delta variant triggers labor shortages or wildfires hurt supply chains.
And lumber isn’t the only building material for which short supply is affecting prices. Since May 2020, according to the National Association of Home Builders, the cost of steel mill products has risen by over 75% and the cost of prepared asphalt and tar roofing and siding products by nearly 15%.
Labor costs have also risen, say experts, due to demand from increased renovations and, in some areas, from extensive rebuilding after wildfires and other natural disasters.
Growth in home renovation and expansion
The pandemic has prompted many more existing homeowners to make renovations that upgrade or expand their living space, especially if the whole family is living, working and learning there.
According to The Hanover Insurance Group, a little more than half (54%) of homeowners have made improvements or undertaken renovations over the course of the pandemic, and more than two thirds (69%) plan to do so within the next year.
That’s a lot of investment into America’s homes, but coverage under homeowners insurance isn’t keeping pace. “When people do these renovations, they’re increasing their replacement costs,” Lavey says. Yet Hanover’s study found that only 40% of the homeowners who undertook major renovation projects contacted their insurance companies to adjust their coverage levels to reflect the value of their home factoring in the new improvements.
Your insurance upgrade options
This is an opportune time to have a conversation with your insurance carrier or broker to make sure you don’t have a coverage gap in your homeowners policy.
You can simply raise the insured value of your home to cover the gap. But depending on the type of coverage you have, raising the value could still leave you vulnerable to future cost gaps.
The most basic coverage type, known as an actual cash value policy, factors in depreciation of the home’s components — its roof, say, or kitchen appliances. As a hedge against depreciation, many homeowners buy what’s known as enhanced replacement cost coverage, which allows the payout to exceed the home’s insured value — typically by 25% to 50%. Naturally, that buffer comes at a price — a 10% premium increase is typical, says Nancy Albanese, vice president of personal insurance at BMT Insurance Advisors.
Then come guaranteed replacement cost policies, a further enhancement that ensures your home will be restored to as close to its original condition as possible, without regard for cost. This ultimate coverage can add a further 20% to 25% to your premiums, says Albanese, but protects those who have very high-end fixtures and finishes, such as granite countertops or marble flooring.
“We would argue you really need to talk to a professional and help you estimate the replacement cost of your home,” Lavey says. “Today with the advancement of analytics and availability of third-party data, we’re getting smarter and better about that topic.” And while you might not be able to do anything about price inflation, you can make sure your home is protected from its effects if you experience a disaster.
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