Six ways to ensure your home is insured to value - Arrowhead General Insurance Agency, Inc.

As both the frequency of natural disasters and the cost of construction continue to rise, many homeowners may find themselves underinsured for this new reality. Are you adequately insured to repair or rebuild your home after a disaster? Here’s why it matters and what you can do to protect yourself.

Natural disasters and high construction costs are driving up home rebuilding costs, making it crucial to ensure your home is insured to value.
Consult local builders and work with your insurance agent to adjust your coverage based on current rebuilding costs.
Regularly review your homeowners’ policy and conduct home inventories to maintain adequate coverage.

The rising threat of underinsurance

Natural disasters and increased risks

In recent years, the United States has seen an increasing trend of high-cost natural disasters, including tornadoes, wildfires, hurricanes and floods. In 2023 alone, there were 28 billion-dollar weather and climate disasters, surpassing the previous record of 22 in 2020 and costing the U.S. at least $92.9 billion. These events severely impacted individuals and caused significant losses for insurance companies, leading to higher premiums and stricter underwriting practices. Unfortunately, this trend shows no signs of reversing; increasingly destructive natural disasters are here to stay.

Related: Wildfire risks are growing. Here’s how they start

Inflation and construction costs

Inflation has also impacted the cost of home insurance. The price of construction materials like lumber and asphalt continues to surge due to unending supply chain disruptions and labor shortages, leading to significantly higher costs to repair or rebuild homes. By some estimates, the cost of material goods for new residential construction rose by 14.3% between October 2021 and October 2022. So, due to this increase in construction costs, the amount you were insured for a few years ago may no longer be sufficient to rebuild your home today.

Related: Homeowners remodeling risks when hiring contractors

Steps to ensure your home is adequately insured to value

With the increasing threats facing your home, you don’t want to risk being underinsured. Fortunately, there are simple steps you can take to safeguard your home against the financial risks associated with inadequate coverage. Here’s what we recommend:

1. Evaluate your current coverage

Start by reviewing your homeowners’ insurance policy. Pay special attention to the amount for which your home is insured in the event of a total loss as this figure will form the baseline for any necessary adjustments.

2. Determine the square footage of your home

You’ll also want to make sure you have precise and up-to-date measurements of your home’s square footage. These measurements are essential to accurately calculate the cost to rebuild your home. Don’t skip this step.

3. Calculate insurance on a square foot basis

With square footage figures in hand, you can then calculate your insurance coverage on a per-square-foot basis, giving you a clearer picture of whether your current policy is adequate to cover the full cost of rebuilding.

4. Consult local builders or associations

While assessing the adequacy of your current policy, you may find it helpful to reach out to local builders or your local building association to get an estimate of the current cost per square foot for rebuilding a home in your community. Keep in mind that construction costs can vary significantly by location due to differences in labor and material costs, as well as local building codes.

5. Work with your insurance agent

Once you’ve properly informed yourself on the current value of your home, collaborate with your insurance agent to verify that your coverage matches local rebuilding costs. You may also consider inquiring how your insurer determined the replacement cost value of your home and ensure they’ve considered factors such as inflation and increases in construction costs when determining that figure.

6. Consider guaranteed or extended cost coverage

At this point, you may also want to look into policies that offer guaranteed or extended cost coverage. These options can provide additional protection by covering rebuilding costs that exceed the limits of your policy due to say, sudden spikes in construction expenses.

Conduct regular policy updates

While your insurer is there to help, the responsibility for ensuring your home is adequately protected ultimately rests with you. Prioritizing regular reviews of your policy is essential to always maintaining adequate coverage. So, consider these additional steps to ensure your coverage remains up to date:

Conduct a home inventory

Since many policies also cover the contents of your home, regularly updating your home inventory is as crucial as reviewing your insurance coverage. Consider using a video camera or a home inventory app, such as Nest Egg, to document everything in your home, including inside drawers, closets and the basement or garage. If you take photos or video, make sure to store this inventory in a secure location like a fire-resistant safe, with a trusted friend or in a safety deposit box.

Key triggers for updating your policy

Of course, there are certain life events or changes to your home that should prompt an immediate review of your insurance policy. These include:

Home additions or renovations: Basically, any changes that increase the square footage or value of your home.
Acquisition of high-value items: Items like jewelry, fine art of antiques may require additional coverage.
Household changes: You may need to update your coverage when someone moves in or out, or if you get a new pet.
Home-based businesses: You’ll also want to ensure you have adequate coverage for additional business equipment or inventory.
Security enhancements: Adding security systems or fire alarms can sometimes lower your premiums.

Proactive measures to manage policy costs

The cost of homeowners’ insurance is influenced by several factors, including location, claims history, credit score and home features. However, the recent rise in natural disasters and construction costs have significantly impacted insurance premiums for many homeowners. If your home is in Nebraska, Louisiana or Oklahoma, you pay among the highest average annual home insurance premiums due to frequent natural disasters. There’s little to nothing you can do to change this. However, there are some proactive measures you can take to manage your policy costs, even in high-insurance-cost states. Consider the following measures:

Related: Top homeowners risks (and tips on how to lower them)

Install protective devices

To help avoid losses and perhaps save some money, ask your insurance agent about any savings you might qualify for by taking preventative measures, such as installing smoke detectors, fire alarms, water sensors, interior sprinkler systems and smart home protection devices. You might quality for discounts.

Increase your deductible

You may also benefit from implementing a higher deductible to reduce your premium but be sure you have sufficient savings to cover additional costs in case of a claim. This might not work for everyone but depending on your situation, the immediate savings might benefit you.

Bundle policies and explore retention programs

Combining, or bundling, home and auto insurance policies with the same carrier, for example, may entitle you to receive discounts. Many insurers also offer premium discounts or credits to long-term customers. So, consider reaching out to your insurer to inquire about these or other possible discounts.

Ensuring your home’s protection

Making sure your home is insured to value is an ongoing process that requires regular reviews and updates to your policy. But by understanding your coverage, accurately calculating rebuilding costs and taking proactive measures, you can effectively mitigate the risk of being underinsured. As the old proverb goes, ‘It’s better to be safe than sorry’. Be sure to work closely with your insurance agent to ensure your policy reflects the true value of your home, providing you with much-needed peace of mind in the face of rising costs and increasing natural disasters.

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