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Inflation & Home Insurance: How to Save Money

The U.S. inflation rate stands at 8.3% in August, which is a 40-year high.

That means higher prices for everything from Buicks to Barbie Dolls for average Americans – and a whole lot more consumer products and services.

One under-the-radar inflation area is homeowner’s insurance, which is also negatively impacted by high prices.

According to industry statistics, the total cost of a U.S. homeowners insurance policy surpassed the rate of inflation from May, 2021, to May, 2022. Statistically, the U.S. inflation rate clocked in at 8.6% during that timeframe while the price of the average homeowner’s policy rose by 12.1%.

Why Prices Are Rising

That difference alone could mean a U.S. household may pay several hundred dollars more annually for a good homeowner’s insurance policy, giving consumers yet another financial pricing burden in 2022.

“Home insurance rates have gone up by hundreds and even thousands of dollars,” said Paul Sundin, chief executive officer at Emparion, an online investment service firm.

Home insurance rates went up for reasons related to higher replacement costs and the likelihood of filing a claim. That’s especially the case in these key areas:

Building prices. Construction costs have risen due to inflation and delayed shipments, which home insurance rates followed, Sundin noted.

“Natural disasters have been apparent as well, and these caused an increase in demand and labor, causing home insurance prices to skyrocket,” he said.

Regulatory easing. Home insurance firms have been granted rate increases in practically every state, with an average rate rise of around 4.48% from January 2022 to May 2022.

“This indicates that homeowners can soon spend closer to around $1,445 per year on average, or an extra $62, for the same coverage, compared to the current average cost of homeowners insurance, which is $1,383 per year for $250,000 in dwelling coverage,” said. Jason Porter, a senior investment manager at Scottish Heritage SG. “For instance, Florida is feeling inflation’s effects much like the rest of America. California expects the biggest rate rise for Homeowners insurance, around 15.4%.”

Home prices remain high. Rising home prices, which have cooled somewhat in September, have also contributed to rising home insurance costs.

“While the housing demand has slowed down, the supply isn’t moving fast enough to make any difference in this sector,” Sundin said. “In Atlanta, for example, the available inventory at the end of May was only enough to last for about 1.2 months, which isn’t enough to move prices downward.”

Current 30-year fixed mortgage rates of over 6% are also making things worse, making it harder for consumers to find comfort in high home prices. “Because of the current trends, things may cause further angst in the housing market for the rest of the year and that may continue until 2023,” Sundin said.

What Homeowner’s Insurance Covers

Factors and features included in a typical home insurance policy also contribute to fluctuating prices. These policy coverage features top that list.

Covered and uncovered. Home insurance typically covers the dwelling, other structures on the property, personal belongings, and liability. 

“Some common things that are not covered by home insurance are flood damage, earthquakes, wear and tear, and intentional damage,” said Linda Chavez, CEO of Seniors Life Insurance Finder in Los Angeles, Cal.

Riders a factor. There are specific riders or add-ons that homeowners can purchase to cover these excluded items.

“Those riders provide coverage for add-ons or excluded items such as flood damage, earthquakes, and intentional damage,” Chavez said. “These riders or add-ons typically come at an additional cost.”

Home condition. The strength, stability and condition of a home also typically impact home insurance costs, particularly in these key areas, Chavez said.

Age and condition of the home: Older homes tend to be more expensive to insure because they are more likely to have problems such as wiring issues or outdated plumbing. 

Location of the home: Homes that are located in areas prone to natural disasters or crime tend to be more expensive to insure. “This is because there is a greater risk of the home being damaged or destroyed,” Chavez said.

Type of home: Some types of homes, such as those made of brick or stone, are more expensive to insure because they are more expensive to rebuild. 

Amount of coverage: The amount of coverage you purchase will also impact the cost of your home insurance. “More coverage typically costs more money,” Chavez added.

Perhaps the largest factor that can impact a homeowners insurance rate is how the
company itself is performing in the state where the policy exists.

“It’s called a loss ratio, and if a company is losing money in your state, they
are likely to file for larger rate increases,” said Joel McCool, vice president of sales and
operations for The Churchill Agency. “This may seem unfair to the homeowner for a few reasons, primarily if they have not themselves filed a claim.”

“It’s also completely out of the homeowner’s control, so if you do see those increases, it is best to shop with an independent agent, get a new A-rated company and move on,” he noted.

For clients that do have a claim, that claim can affect your policy rate.

“Even if the company does not “rate up” your policy, you may still lose “claim free”
discounts that can often deliver a 10-30% savings,” McCool said. “Imagine losing a 20%
discount, and then the company’s rate goes up by 10%. That would effectively be a
30% increase to your overall cost.”

Therefore, your damage needs to be considerable before filing a claim, McCool said.

“If the damage is anywhere close to the deductible, it may be better to just pay it out of pocket,” he added. “If you have multiple claims in a three-year period, you may also see your rate
skyrocket.”

Inflation Reduction Act May Impact Home Insurance Costs

The recently passed Inflation Reduction Act that passed should also leave an imprint on home insurance costs going forward.

“The Inflation Reduction Act that passed this year could impact home insurance costs in a number of ways,” Chavez said. “One way is that it could lead to more people installing solar panels and other eco-friendly homeowner practices. This would reduce the demand for coal and oil, which are used to generate electricity.”

The Inflation Reduction Act could also lead to more people insulating their homes. “This would reduce the amount of heat that escapes from homes, which would lead to lower energy bills,” Chavez added.

Keep in mind the Inflation Reduction Act is not affecting insurance costs directly.

“Homeowners can receive a discounts on the cost of upgrading their homes to be more eco-friendly, but these are limited to the actual upgrades, not the cost of insuring them,” said Shri Ganeshram, CEO at Awning, a real estate investments company.

Tips for the Rest of 2022

With summer in the rear-view mirror and colder weather ahead, it’s a good time to review homeowners insurance policies, especially as inflation and home remain on the rise. Insurance experts advise taking these key steps to get that job done.

#1: Check your policy. As Americans approach the end of hurricane season, wildfire season, and winter weather, it’s important to check your homeowner’s insurance policy to make sure you’re adequately covered.

“If you live in an area that’s prone to any of these disasters, review your policy to see what kind of coverage you have and whether it’s enough to protect your home and belongings,” Chavez advised.

If you’re not sure whether your policy covers disasters, contact your insurance company or agent to ask.

“It’s also a good idea to keep an up-to-date inventory of your possessions in case you need to make a claim,” Chavez added. “Also, be sure to stay up to date on your premiums and deductibles, as they may change from year to year.”

#2: Consider inflation when choosing coverage. When selecting coverage for your home, it’s important to factor in the potential for inflation. “The cost of rebuilding your home and replacing your belongings can go up over time, so make sure you have enough coverage to cover the increased costs,” Chavez noted.

To get an idea of how much coverage you need, ask your insurance company or agent for a home replacement cost estimate. “This will give you an idea of how much it would cost to rebuild your home from scratch, which can be helpful in choosing the right amount of coverage,” she added.

#3: To save money, consider combining your auto and home policies with the same company.

“The discounts from combining can be 10-30% when applied to both the auto and the home policies,” McCool said. “Also, a policy review will evaluate whether or not your home is not covered for the correct amount. Many times, homes are over-covered and therefore cost more
for the coverage you don’t need.”

“It’s also important to know policies increase in coverage year-after-year automatically,” he added.

#4: Go ahead and negotiate. If, for whatever reason, you can no longer afford home insurance, contact your insurance agency right away.

“Sometimes you can cut your insurance rate literally in half by having the independent agent shop around with multiple carriers,” McCool said. “If it’s still unaffordable, there are other types of policies available called “fire” policies that cover basic perils such as fire, wind, smoke,
and several other major causes of damage.”

Those policies are typically not as expensive as typical homeowners policies that cover many more perils.

“While you would ideally have a more comprehensive policy, if you’re really in a
bind, this is a more affordable alternative to cover general catastrophes,” McCool said.

#5: Avoid small claims. Excessive small home insurance claims add up to your claims history, which is one of the main factors that affect your premium.

“Even if a minor instance is covered, filing a claim may not be the best option,” Sundin said. “The impact of small claims on your home insurance premium may be much bigger than the cost of an out-of-pocket expense.”

“Take note that plenty of insurers often reward customers with discounts for being claims-free for a certain number of years,” he added.

The homeowners insurance industry is in a period of change, and of risk. That’s primarily due to runaway inflation and a roiling U.S. residential property market.

To keep afloat in a sea of chaos, homeowner should check in with their insurance companies and review their policies, and be prepared to shop around if they don’t get the policy they really need.

“People need to be aware that homeowners insurance costs have risen since the value of the property insured has been rising,” Ganeshram said. “While many consumers and investors have not been hit by rising costs yet, most will renew at the start of the new year and there could be big changes.”