Lumber prices and insurance rates have spiked in recent months. According to Business Insider, lumber prices increased more than 250% year-over-year from April 2020 to April 2021, and although they have come down in recent weeks, they are still much higher than before the pandemic.
As the cost of lumber goes up, so does your home’s replacement cost estimate and your homeowner’s insurance rate.
Several factors have caused lumber costs to surge:
- Homeowners devoted more time to DIY projects during the pandemic
- Mills and production facilities were shut down or working reduced hours during the pandemic
- Supply chain disruptions
- Low-interest mortgage rates fueled new home purchases
- Demand outstripped supply
Construction Costs Increase Homeowners Insurance Premiums
Even if you aren’t purchasing or building a house, you may feel the sting of inflation due to lumber and other building materials costs. Rising construction and reconstruction costs show up in your home’s replacement cost estimates. Skyrocketing construction costs make your home more expensive to build. To cover the expense, insurance companies raise insurance costs.
The National Association of Home Builders states that the price of lumber tripled from April 2020 to April 2021, adding almost $36,000 to the cost of building a house. The cost of framing lumber increased 250% from $350 per thousand board feet to $1,200.
When your insurance company renews your policy, they calculate how much it would cost to rebuild your home at today’s prices. If the costs are higher, your annual premium increases.
Do I Have to Increase My Policy Limits and Coverage?
Most insurance companies require you to insure at least 80% of the cost to rebuild your home. Your mortgage company also requires you to have enough insurance to pay off your loan in the event of a tragedy.
If you have the option of insuring your home for less, consider how you will pay the difference. Insurers typically prorate the claim based on your coverage. If the cost to rebuild your home is $300,000 and you insured your home for $200,000 or 67% of the replacement cost, your insurance company only pays that percentage to repair your home minus your deductible.
Review Your Current Homeowners Insurance Policy
Because capital improvements and inflation affect the value of your property, they also impact the 80% rule. Ensure you have replacement cost coverage rather than actual cash value (ACV).
Replacement cost coverage ensures you have the funds to rebuild your home in the event of a loss. The cost to rebuild your home has likely increased due to the price increase in lumber and other building materials.
If you have ACV coverage, this only covers what your home is worth and not the guaranteed replacement cost. The ACV can fluctuate within the housing market, and you may not have the funds to cover all construction costs if your home suffers extensive damage.
Contact Your Insurance Agent
If you were one of the 64% of homeowners who took advantage of the stay-at-home orders to renovate your home, make sure you update your insurance agent and policy. A new deck, FROG, or kitchen remodel are capital improvements that affect the value of your home and won’t be covered unless you update your policy.
Although these upgrades increase your homeowner’s insurance premium, you need to ensure you are fully covered in the event of damage to your property.
How Can I Lower My Insurance Costs?
The easiest way to lower your homeowner’s insurance costs is to increase your deductible. The deductible is the amount you have to pay toward a loss before receiving your payout from an insurance company. The higher your deductible, the more you can save on your insurance premiums. Raising your deductible to $1,000 from $500 can save you as much as 25% on your premiums.
Maintaining good credit can also help lower your premium. Pay your bills on time and keep your credit card balances at less than 30% if possible.
Shop around for the best price and quality service. The National Association of Insurance Commissioners (NAIC) has information to help you find the best insurer to meet your needs.
You can also consider bundling your home and auto insurance from the same insurer, but make sure it is cheaper than buying separate coverages from different companies.
If you are over 55 and retired or work from home, ask for a discount since you are less likely to be burglarized. You may also receive a discount if you have a security system and sprinklers installed.
When Buying a Home, Consider the Homeowners Insurance Cost
Homeowner’s insurance is integral to the home buying process and ownership. Before buying a home, check out the Comprehensive Loss Underwriting Exchange (C.L.U.E.) report on the home you are considering buying.
This report contains the insurance claim history of the home and can help you assess if the property has a history of problems. Knowing this can help you determine your deductible and if you need endorsements for flood insurance or an earthquake policy.
Ensure You Have Adequate Insurance Protection
If you have questions about your home insurance policy, talk to your agent. Increased lumber and construction prices could lead to higher claim expenses. You may discover that your existing policy limits and coverage no longer offer adequate protection, leaving you financially vulnerable in a disaster.
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Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.