One of the primary factors that impacts your homeowners insurance rate is your dwelling coverage limit, which is typically based on the replacement cost value of your home. The higher your home’s replacement cost value is, the higher your home insurance rate is likely to be.
Replacement cost value is based on the cost to rebuild your home from the bottom up to its original quality, including construction and materials costs. As the cost of building materials has been on the rise, home insurance rates have also increased.
To help you understand these rising costs, here’s what you need to know about homeowners insurance and the rising cost of building materials.
Replacement Cost Value & Actual Cash Value
Homeowners should understand the difference between replacement cost value and actual cash value as it directly relates to their dwelling coverage limit.
Replacement cost value is the total cost, including construction and building materials, that it would take to completely rebuild your home from the ground up. If your dwelling coverage limit is set to your home’s replacement cost value, then if your home is destroyed by a covered peril, your insurance policy will pay to completely rebuild your home.
Actual cash value, on the other hand, is the depreciated value of your home at the time of the covered loss. This means that if your home is destroyed by a covered disaster, your policy will only pay you what your home was most recently worth. In this case, you would likely have to pay for a portion of the construction expenses out of your own pocket.
Replacement cost value policies tend to be more expensive, but in exchange, they offer a higher level of coverage in case you experience a significant loss.
How Building Materials Costs Impact Insurance Rates
Since replacement cost value is based on the total cost to rebuild your home, as building material costs rise, so will your home’s replacement cost value.
Assuming your dwelling coverage limit is set to your home’s replacement cost value, this means your coverage limit will also increase. When your coverage limit increases, so does your homeowners insurance rate.
Why Building Material Costs Are Rising
Understanding why building material costs are rising can help homeowners understand why home insurance rates may be higher than normal.
There are a few key reasons that have caused building material costs to rise — most of them stemming from the COVID-19 pandemic.
Due to the pandemic:
● Demand for single-family homes has gone up
● More homeowners are using their funds for home renovation projects, driving up the demand for building materials
● Supply chain issues are causing shortages across multiple industries, including the construction industry
On top of these factors caused by the pandemic, historically low interest rates also encouraged more people to build new homes and start renovation projects.
As building material costs surge, homeowners may face higher insurance rates to accommodate the increased cost of claims.
Other Factors That Impact Homeowners Insurance Rates
If you're having trouble finding affordable home insurance rates, it may not be solely due to increased building material costs.
There are several factors that can impact homeowners insurance rates, including:
● Risk factors (e.g. fire risk, hurricane risk, etc.)
● Age of home
● Home construction
● Home amenities (e.g. pool, trampoline, etc.)
● Claim history
● Coverage limits
These factors, among others, may be used by home insurance providers to determine your monthly premium and deductible. To find the most affordable policy possible, it’s important to shop around and compare quotes from multiple providers based on similar coverage limits.
Review Your Policy
To ensure you have adequate coverage in case of a disaster, it’s important to review your homeowners insurance policy regularly.
If you have actual cash value coverage, you may face higher out-of-pocket expenses after a loss due to the increased cost of building materials. To avoid significant out-of-pocket expenses, it may be worth considering adjusting your coverage to ensure you are able to repair or rebuild your home after a covered loss.
Homeowners shopping for a new home insurance policy should strongly consider purchasing a replacement cost value policy to ensure they are sufficiently covered. While premiums for these policies may be higher due to the rising cost of building materials, they can significantly reduce your out-of-pocket expenses if your home is destroyed by a covered peril.
Request a Homeowners Insurance Quote
Homeowners insurance is essential to protect your home and personal belongings from a wide range of common disasters. Though, due to the increased cost of building materials, it can be difficult for homeowners to find a home insurance policy that meets their needs and fits their budget.
Contact FIB insurance today to request a custom quote and learn more about home insurance in Miami, FL.