Inflation does both good and bad to the value of your home. While inflation drives the value of your property higher, it also makes the cost of rebuilding it ultimately bigger. It’s a good picture for a homeowner who’s after the bigger resale value, but a dim scenario for the one who intend to keep his/her home for good. Inflation guard coverage is an add-on endorsement to keep your home insurance at par with the cost of rebuilding it.
Unless updated periodically, insurance policies retain their nominal value to the time that you acquired them. That is, despite market forces, the value you can expect from them are fixed and will be rigid in provisions. In an ideal setting where the inflation rate is steady, this can be good enough. But the harsh reality is that the economy with all its financial wizards only provides a forecast or a mere outlook of what’s going to happen. The GDP can be strong but the global financial scenario will still affect most financial indicators.
To a homeowner, this translates into being left in the dark. As you depend on your home insurance to cover you against unforeseen risks, the actual value you can derive from them doesn’t equate to the amount when you bought them. The cost of buying your home is no longer equal and in fact far enough from the cost of rebuilding it. When you hope that your insurance takes care of it all, you might be mistaken. The disparity between the acquisition cost and rebuilding cost is what inflation guard coverage aims to break.
Table of Contents
How does inflation guard coverage work?
To set a clear case, if you bought a house for $1,000,000 and had it insured at such amount, the same insurance may no longer be enough to cover the cost of rebuilding it after some time. Depending on the inflation rate, your insurance amount could have lost some of its purchasing power despite retaining its nominal value. If in case you would need a complete rebuild due to a major disaster such as fire or an earthquake, your insurance at $1M acquisition value will no longer be enough and that you might have to spend a certain amount from your own pocket. If your insurance agent didn’t explain this to you, then you are practically under-insured without you knowing it.
The advantage of having an inflation guard coverage is it keeps your insurance at par with the actual value for the included provisions. While you enjoy your home’s appreciating value with inflation, inflation guard protects you from losing the tangible value of your supposed benefits.
How do I purchase inflation guard coverage?
Some insurance policies may already include inflation guard coverage on their package. But in cases where it’s not, you may want to discuss with your agent how this endorsement can benefit you. If this is going to be an add-on, then you can expect to have an increase in your premium. At any rate, knowing what inflation guard offers is vital to securing your interests amidst market forces that you don’t have any influence over. Understanding your own circumstances puts you in a better stance in deciding whether you will go for this endorsement or not.
Do I Need It?
If you see yourself owning or staying in that same house for good and you have the budget, an inflation guard coverage will be good for you. But if you are the homeowner who sees rising resale value from a business perspective, then this might be of little practical importance to you. Inflation is double-sided, what matters is that you know your perspectives and where they are coming from.