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What is Inflation Guard, and why does my homeowners insurance rate go up every year?
This is a question I get asked a lot, almost daily I would say.
There are many factors that can cause your homeowners insurance rates to change, but only one that will cause a constant increase; Inflation Guard. Let’s look at some of the potential factors that may impact your premium.
Factors that could cause an increase include:
Rate Increase – Your carrier filed for a rate increase, it was approved, and now your policy has been impacted. The percentage of the increase would ultimately determine how much of an impact it would be. Oftentimes a client won’t know about the increase until their mortgage payment increases to cover the escrow. Did you know that you could be doubly impacted should this occur? Let’s say your policy increased by $40 per month due to a rate increase. When your mortgage bank pays the new policy invoice they must recoup the difference while also preparing for this new amount at renewal. What does that mean? That means, your mortgage payment goes up by $80 per month; $40 for the deficit in the escrow to cover this new term and $40 to prepare for the next renewal.
Claims – Unfortunately, claims do occur. To add insult to injury, after you go through the not so fun claims process, you are frequently hit with an increase at renewal. Depending on the carrier, the type of claim, and the amount of the claim, the increase could be small or large.
Deductible Change – If this occurs your policy can actually decrease, but still at a potential future cost to you. When a deductible is increased, it typically causes a decrease in your premium, you take on more risk so they take off some premium. Sounds good, right? Well, not always. When consulting with my clients, I usually advise them to take a higher deductible to reduce premiums paid over the long term. The deductible decision depends on the client’s level of risk tolerance; you wouldn’t take on a $10,000 deductible if your finances don’t support that in an emergency.
This brings me to an excellent example, where a lot of policy holders received a sudden reduction in their premiums: A few years ago, a very large national insurer sent out generic letters to their policyholders, prior to renewal. This letter advised that the carrier would be increasing the policyholder’s deductible to 1/2% of their dwelling amount which triggered a nice little reduction in premium cost. Fantastic! Right??? Well, if your home insurance policy is currently insured for a dwelling amount of $550,000 with a $1,000 deductible, your new deductible will be $2,750 (.05% x $550,000)! You see what they did there? You saved money on your premium as you take on more liability in the deductible going from a $1,000 to a $2,750 deductible. Is that the right thing for you? Maybe, maybe not. This same change can occur with hurricane deductibles (look for a future post).
Now we have come to the reason why your policy can increase steadily year after year…
Inflation Guard – Depending on the carrier and state, this may be an optional coverage for you. A broker or agent who values client protection should automatically include this on your policy, but of course give you the option of declining it. Inflation Guard will increase the dwelling coverage on your policy by a certain percentage rate, typically between 2%-5% at every renewal. Why? Well, as we all know costs increase over time. By having the inflation guard on your policy, you’re ensuring that your policy coverage is keeping up with the increasing costs of building materials and labor costs. To clarify, this is not a 2%-5% increase in your total premium, it is a percentage increase in your dwelling coverage portion. Will this increase your premium, yes.
So, there you have it. The inflation guard is usually the culprit responsible for your annual premium increase.
One of the ways to help insulate yourself from rising insurance costs is to seek the help of an independent agent, like myself. Unlike captive agents and direct insurers, I work with multiple carriers so my clients always have options.
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