If you own a home or commercial property, it’s important to insure your property to value to protect yourself against factors that could increase the cost to repair or replace your home, including inflation, construction costs, and building material shortages.
Underinsurance can make it difficult or even impossible, in some cases, to repair your property to its original quality if it is damaged or destroyed by a covered hazard. Nearly 60% of homes in the United States are underinsured, leaving these homeowners at risk of financial ruin if their homes are destroyed.
To avoid this, it’s important that insurance providers and policyholders accurately assess the value of their properties and purchase coverage that insures the full value of these properties.
Here’s everything you need to know about the importance of insuring properties to value.
Replacement Cost Value & Actual Cash Value
Policyholders should understand the difference between replacement cost value (RCV) and actual cash value (ACV) as the difference between these types of coverages can impact their ability to replace or repair their properties if they are damaged or destroyed.
Replacement cost value refers to the total cost required to replace a property with a new one of the same quality based on current construction costs and the current price of building materials. While these policies may be more expensive, they ensure that your property will be restored to its original quality if it is destroyed.
Actual cash value policies, on the other hand, pay up to what your property is actually worth at the time it is damaged or destroyed. This means that if your home depreciates in value, then your policy will not pay enough to restore your home to its original quality. For example, if your home’s roof is 15-years-old, the insurer would calculate how much your roof is worth after 15 years of wear and tear and pay you that much. It would not pay to replace your roof based on its original value.
ACV policies are generally cheaper than policies that offer RCV coverage; however, your out-of-pocket expenses will typically be much higher with ACV coverage.
How Building Materials Affect Construction Costs
One of the biggest factors that affect construction costs is the rising cost of building materials. Supply chain issues and material shortages can drastically increase the cost of building materials, which in turn, increases the cost of rebuilding your home if it is destroyed.
With RCV coverage, homeowners insurance policies pay to rebuild your property to its original value even if construction and building material costs have increased since the policy went into effect.
Since actual cash value policies only pay what your home is worth at the time of damage, the current cost of building materials and construction costs has a significant impact on your out-of-pocket expenses.
Other Factors That Impact Property Value
Aside from the cost of building materials, there are several factors that can impact the value of your property over time, including::
- Housing market fluctuations
- Labor shortages
- Climate change and natural disasters
- War and international conflicts
These factors can have a significant impact on property values and construction costs. When these costs rise, underinsured homeowners suffer as they become susceptible to severe financial damages if their homes are damaged or destroyed by a covered peril.
The Importance of Reassessing Coverage Limits
To protect against inflation and rising construction costs, it’s important for homeowners to reassess their properties’ values and coverage limits periodically. By doing this, homeowners and commercial property owners can ensure their properties are insured to value, protecting them against extreme out-of-pocket costs if their properties need to be replaced.
Property owners should talk to their insurance providers to request written quotes for higher coverage limits. Property owners should also consult a professional to assess their property’s value and ensure that the quoted coverage limit is enough to fully replace or rebuild their property to its original quality.
Request a Quote
Many property owners are underinsured. Even if your policy limits were originally enough to cover your property’s full replacement value, factors like inflation, the cost of building materials, and labor shortages may increase the cost to rebuild your home and leave you underinsured if you don’t reassess your home value and coverage limits.
At KSA Insurance, we work with homeowners in South Carolina and across the southeastern United States to help them find affordable, comprehensive homeowners insurance policies that insure properties to their full value and protect property owners against a wide range of common risks.
Contact KSA Insurance today to request a quote and learn more about homeowners insurance.