Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Eating Your Home Insurance Rebuild Cost
Transcript
- Lucas: If your house burned down tomorrow, would your insurance check actually cover the cost to rebuild it? For a lot of homeowners, the honest answer is no—and the gap is getting wider faster than most people realize. Luna: We're talking replacement-cost inflation, right? Because even if your policy has that 'guaranteed replacement cost' language, the actual numbers have shifted dramatically. Lucas: Exactly. According to the latest CPI data from May, the index for 'owners' equivalent rent' is up, but that's just one piece. The real shocker is in construction inputs. Lumber prices, labor shortages, supply-chain delays—since 2020, the cost to rebuild a typical single-family home has risen about 40 percent nationally. Some markets are even higher. Luna: And yet most policies automatically renew based on whatever value the insurer assigned two or three years ago. That's a recipe for serious underinsurance. Lucas: Right. And look—if this kind of practical money conversation is useful to you, the reason we can keep doing these without ads is listener support. If you'd like to help, you can buy me a coffee at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the show going. Luna: Yeah, it really does make a difference. And now back to that rebuild gap—because it's a lot bigger than most people realize. Lucas: So let's put some numbers on it. The Insurance Information Institute estimates that about 60 percent of U.S. homes are underinsured by an average of 20 percent. That means if your dwelling limit is $300,000, the actual rebuild cost might be $360,000 or more. You'd be on the hook for the difference. Luna: And that's assuming you even have a policy that covers replacement cost rather than actual cash value. A lot of older policies depreciate your roof, your siding, your kitchen—suddenly you're getting pennies on the dollar. Lucas: That's the HO-3 versus HO-2 distinction. Most homeowners today have an HO-3, which does cover replacement cost for the dwelling. But the policy still has a dollar limit. And that limit is where the inflation trap lives. Luna: So what should a homeowner actually do? Call their agent and ask for an inflation guard endorsement? Lucas: That's one option. Many insurers offer an automatic inflation adjustment—usually 4 to 8 percent annually—but it may not keep up with real construction cost increases. The better move is to ask for an 'extended replacement cost' endorsement. It adds a buffer, typically 25 to 50 percent above your dwelling limit. The premium increase is usually modest—maybe 10 to 15 percent extra per year. Luna: And if you've done any renovations—new kitchen, finished basement, added a bathroom—that also needs to be reflected. Because your policy limit was set before those upgrades. Lucas: Exactly. And this isn't just about wildfire zones or hurricane areas. Even in a quiet suburb, if a tornado or a burst pipe takes out your home, you're dealing with a total rebuild. The labor market for construction hasn't loosened up, and material costs are still elevated. The PCE price index for May showed goods inflation cooling a bit, but services—which includes construction labor—remains sticky. Luna: So the typical 'just trust my insurer to update it' approach doesn't work. You have to proactively check. Lucas: Right. And here's a concrete step: get a replacement cost estimator from your carrier. Many insurers have online tools. Then compare that number to your current dwelling limit. If the gap is more than 10 percent, call your agent. Ask about the extended endorsement. Luna: Also worth mentioning: if you have a high deductible, that's a separate issue. A $10,000 deductible might have been manageable five years ago, but with inflation, that same $10,000 buys less labor and materials than it used to. Lucas: Good point. And for those with older homes—especially pre-1970s construction—the replacement cost can be even higher because of building code upgrades. Some policies include 'ordinance or law' coverage, but not all. That's another gap to check. Luna: It's almost like inflation is a hidden tax that hits homeowners hardest when they're already in crisis. Lucas: That's exactly what it is. And the frustrating part is that most people don't discover the gap until after a loss. By then, it's too late to fix the policy. Luna: So the takeaway: call your insurer this week. Get the updated estimate. If the numbers don't match, adjust your coverage. It's a few hours of work that could save you tens of thousands. Lucas: And keep an eye on those CPI and PCE releases. The May core PCE showed inflation still running above the Fed's target, which means construction costs aren't likely to drop anytime soon. The best hedge is a policy that can flex when prices rise. Luna: All right, let's leave it there. If you want to support the show, we're at buy me a coffee dot com slash fexingo. And if you have a topic you'd like us to tackle, drop us a line. Lucas: We'll be back tomorrow with another angle on protecting your purchasing power. Until then, keep your coverage current.