August 03, 2023
You likely are well aware that it has become a lot more expensive to protect your home. The average homeowner insurance policy has seen double-digit percentage increases in annual premiums in each of the past two years. The average premium is now around $2,000 a year.
And that’s just a national average. Florida homeowners can pay three times as much, on average, and the state’s public insurance program has asked for a 14% increase for next year.
While hurricanes are the big risk in Florida, wildfires are a persistent risk in California (and this last winter, winter floods hit too). Across the Midwest and South, there were already 10 weather-related losses through June this year that caused at least $1 billion in damage. In July, areas in the Northeast were hit with devastating flooding from fierce rainstorms.
On top of the increased risk from weather-related damage, insurers are also reeling from rising construction costs caused by supply chain problems. That increases the cost of claims. We can only hope the recent cooling in inflation will help keep those costs from continuing to climb.
But the bottom line is that most of us live somewhere that has seen increased weather-related damage to property. And that means protecting your home now costs a lot more.
I know budgets may be stretched. But please don’t skimp on your homeowners insurance. Your home is likely a big part of your net worth. I know it can be tempting to reduce your coverage. That’s rarely a good idea, but certainly doesn’t make much sense given the increase in severe weather events in recent years.
In fact, I want you to make sure your current insurance provides enough protection. One survey estimates that more than half of homes are underinsured. The average underinsurance is estimated to be more than 20%. That could end up costing you tens of thousands of dollars if you find out too late that you didn’t have sufficient coverage.
At a minimum I want you to have a policy that covers the “replacement cost” of property damage. If you can get a policy with “extended replacement cost” that’s the best choice. In the event you have a major loss, your insurer will consider a payout that is as much as 125% or so of your stated limit with an “extended replacement cost” policy.
The one thing you must promise to avoid is a policy that will base its claims payout on the “actual cash value” of the damaged property. Actual cash value only covers the depreciated value of what you need to replace. For example, if your 15-year-old roof blows off, an ACV policy will leave you with a big out-of-pocket expense to cover the price difference between a 15-year-old roof and the new roof you need.
And for those of you who haven’t had to worry about floods in the past, but realize that might now be a risk to consider, check with your current home insurer for help. Most flood insurance is offered through the Federal Emergency Management Administration (FEMA). But that program limits maximum coverage to $250,000 for your home and $100,000 for your belongings. If you need more protection, there are flood insurance policies from private insurance companies that can have higher limits.
I realize boosting your coverage means finding more cash to cover the added expense. And that may not be easy. I get it. All I ask is that you make it a top priority in your financial life. When it comes to protection, especially protecting such a valuable asset, we can hope for the best, but our financial security depends on planning for the worst. Please do your best not to skimp on your homeowners insurance.