3 Potential Costs to Consider When You Buy Homeowners Insurance

Many homeowners insurance policies cover a home up to the house's fair-market value, which is whatever amount the house would sell for at the time of an incident. While this is sufficient in some situations, there are other times where this level of coverage doesn't fully protect a home. 

If a disaster renders your home a total loss, you'll need money to rebuild your home — and rebuilding costs can exceed fair-market value. Especially after a major storm or other disaster, the cost of materials and labor to rebuild a house can exceed what a built house will sell for.  

To see just how much rebuilding costs can increase after a major disaster, consider Louisiana after Hurricane Katrina hit the coastline and New Orleans. On average, construction repair costs went up by  15 percent after the storm. In some coastal counties, the increase was 35 percent.  

In order to mitigate potential sudden increases in repair costs, homeowners insurance policies offer a couple of coverage options. Extended replacement cost coverage typically increases a policy's limit by 10 to 20 percent if the cost of rebuilding goes up. Guaranteed replacement cost coverage usually covers the price of rebuilding your home without any limits on cost. 

Hurricane Katrina is helpful in seeing how these two coverage options can be helpful. Extended replacement cost coverage would've been sufficient for most homes if the coverage provided an extra 20 percent worth of protection. Homes near the coast where rebuilding costs increased by as much as 35 percent, though, would've needed guaranteed replacement cost coverage. 

Even if construction costs don't rise because of a storm, the cost of repairing or replacing your house could still increase in the future due to inflation.  

Even though inflation might seem like a relatively small percentage on a yearly basis, it can add up to quite a sum over time. The average inflation rate in the United States is 3.22 percent, which is enough to double prices every 20 years. If you stay in your home for just two-thirds of a 30-year mortgage, the cost of rebuilding your house could double in that time. 

When you consider the value of a house, a doubling in cost is no small issue. A home that's worth $125,000 today could be worth $250,000 in 20 years, and one that cost $500,000 to build today could have rebuilding costs of $1 million in two decades. 

To protect against this likely risk, many homeowners insurance policies offer inflation guard through a rider or endorsement. A rider or endorsement is an optional feature that gets added to a policy, and it protects against a specific risk. In this case, an inflation guard protects against the risk that your home's rebuilding costs will probably go up each year. 

Your house itself isn't the only thing that can be expensive to replace. Even in a comparatively minor claim, the cost of replacing belongings that are damaged, destroyed, or stolen can be significant. Often, the price of new items is much higher than the value of owned items that have depreciated. 

Personal belongings are covered under personal property protection, which comes with most homeowners policies. Personal property protection that provides replacement cost coverage will pay the higher price of buying new things and not just give you what your belongings would've sold for after depreciation was taken into account. 

If you need homeowners insurance with any of these features, contact Illinois Insurance Center.