Why are home insurance costs up if house values are down?

You may have heard that homeowner’s insurance premiums are on the rise despite falling home prices.

The first question is normally, “Why?” How is it possible that the property the insurer covers, which is GOING DOWN in value, costs us more money to insure?

Isn’t homeowners insurance for a $400,000 property less expensive than a policy for a $500,000 home? Well, yes. But it’s not that simple.

The hyphenated word “counter-intuitive” comes to mind here. And with good reason.

But the insurance industry plays by a unique set of rules. Most homeowner’s policies are based on replacement cost and not actual cash value. It’s referred to as the loss settlement technique.

The actual cash value of a home decreases every year (expressed as cost new, minus depreciated value).

[Why it’s so high.]

Replacement cost policies, however, are designed to rebuild your home using whatever funds are necessary, up to the policy limit, to rebuild your home with materials of “like kind and quality,” which have to be purchased using “today’s” prices.

[Replacement cost vs, actual cash value.]

Enter the U.S. Economy

It’s no secret the economy is suffering right now. There is evidence of a double dip in housing (be patient) and talk about a double-dip recession everywhere we turn.

As the U.S. continues to print money in an effort to stay ahead of a stalling economy, which theoretically anyways, causes inflation – not TTAI’s area of expertise – the prices of the goods necessary to rebuild your home increase.

Wood costs more. Bricks cost more. The cost of getting wood and bricks to your home, using vehicles run by gas, skyrockets…you get the picture.

The cost to build (or re-build for our purposes) a home are up and the insurance company has to pay more money for every insurance claim they pay out.

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Why Us?

Why not us? Insurance companies, like McDonalds raising the cost of a Big Mac, are going to pass these increased costs on to their customers…us!

Not to mention, any time the economy suffers, insurers see an increase in overall claims.

Whether it’s the person who normally wouldn’t file a claim for a small amount of property damage, but does because the budget is tight, or the increase in flat out insurance fraud, where homes, businesses and cars are purposefully destroyed to get out of debt, insurers are paying out more money and passing the buck.

Insurance is another, in a long line, of increasing costs from the fallout of the Great Recession.

What Can We Do About It?

Shop, shop, shop. Contact a local independent insurance agent or get insurance quotes online from multiple different insurers. Even if everyone’s rates are going up, you may find a lower rate than you currently have.

Loyalty to an insurance company pays very little benefit in the way of financial gain. There are a few discounts associated with staying with one insurance company for a long time, but the gain is usually markedly smaller than switching if you are paying too much.

Insurance is necessary, unless you don’t have a mortgage. But even then, insurance is the most cost effective way to replace a home in the event of a major loss.

Read more: How are homeowners insurance rates determined?