Why Does My Homeowners Insurance Company Keep Increasing the Value of My Home?

After a fire is not a good time to realize you do not have enough coverage with homeowners insurance.

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With the national average homeowners insurance premium increasing by 5 percent in 2012, and premiums approaching an all-time average high of $1,000 as of 2013, it pays to make sure that your home is covered in case of a loss. It may be tempting to try to save some money by reducing the insured value of the home. If you reduce the value too much, you may not have replacement cost coverage. To ensure that you are covered, your policy may automatically increase the insured value of your home.

Inflation Guard Coverage

You can purchase a homeowners insurance policy with inflation guard coverage. This coverage increases the declared amount of coverage each year on your home by a pre-defined percentage. This percentage may be based on a pricing index, such as the average inflation rate or the average increase in real estate values in your area.

Establishing a Value

You declare a specific value for your home when you purchase the policy. This value may be based on the insurance agent's estimate of what it will cost to rebuild your home in case of a total loss. It often takes into account the total area of your home in square feet, as well as what type of materials were used to build the home. If your home was built with special materials or imported items, you will need to purchase additional coverage to replace these materials.

Why the Increases

In an economy where the value of consumer goods increases each year, building materials are no different. Your house will cost more to rebuild each year due to these increases. Most homeowners policies with replacement cost coverage will only pay the full price of replacing your home if the insured value is at least a certain percentage of the actual replacement costs, usually 80 percent. By increasing the insured value of your home each year, you are more likely to stay within the limits of the policy and not be surprised to find you have insufficient coverage to rebuild the house if it is destroyed by a fire or tornado.

Effects on Other Coverage

In addition to the coverage for your structure, the insured value of your home affects other coverages with your policy as well. Other structures, such as garages and storage sheds, are usually covered for a percentage of the main structure's value, often 20 percent. The contents of your home, including all of your personal belongings, are also covered at a certain percentage by default, usually 50 percent. Automatic increases in coverage with the structure ensures similar increases with the other coverages, to account for regular increases in replacement costs due to inflation.