Inflation & Home Insurance: How to Save Money

In August, the United States' inflation rate was 8.3%, a 40-year high. This means that average Americans will have to pay more for everything from Buicks to Barbie Dolls, as well as a slew of other consumer goods and services.

Under-the-radar inflation is also affecting homeowner's insurance, which is negatively impacted by high prices.

According to industry statistics, the total cost of a homeowners insurance policy in the United States surpassed the rate of inflation between May 2021 and May 2022. Statistically, the US inflation rate was 8.6% during that time period, while the average homeowner's policy price increased by 12.1%.

Why Prices Are Rising

That difference alone could result in a U.S. household paying several hundred dollars more per year for a good homeowner's insurance policy, adding yet another financial burden to consumers in 2022.

"Home insurance rates have risen by hundreds, if not thousands of dollars," said Paul Sundin, CEO of Emparion, an online investment service firm.

Home insurance rates increased due to rising replacement costs and the likelihood of filing a claim. This is especially true in the following key areas:

Building costs. Sundin noted that as a result of inflation and delayed shipments, construction costs have risen, as have home insurance rates.

"Natural disasters have also been evident, which caused an increase in demand and labor, causing home insurance prices to skyrocket," he said.

Regulatory easing. Home insurance companies have been granted rate increases in almost every state, with an average rate increase of approximately 4.48% from January 2022 to May 2022.

"This suggests that homeowners will soon be spending closer to $1,445 per year on average, or an additional $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. Scottish Heritage SG's senior investment manager, Jason Porter. "For example, Florida, like the rest of the country, is feeling the effects of inflation." California is expected to have the highest rate increase for homeowners insurance, around 15.4%."

Home prices continue to rise. Rising home prices, which slowed slightly in September, have also contributed to rising home insurance costs.

"While housing demand has slowed, supply isn't moving quickly enough to make a difference in this sector," Sundin explained. "In Atlanta, for example, available inventory at the end of May was only enough to last for about 1.2 months, which is insufficient to drive down prices."

Current 30-year fixed mortgage rates of more than 6% are also exacerbating the situation, making it more difficult for consumers to find comfort in high home prices. "Because of current trends, things may cause additional angst in the housing market for the rest of the year and may continue until 2023," Sundin said.

What Homeowner’s Insurance Covers

Variable prices are also influenced by factors and features included in a typical home insurance policy. These policy coverage features are at the top of the list.

Covered and uncovered. The dwelling, other structures on the property, personal belongings, and liability are typically covered by home insurance.

"Flood damage, earthquakes, wear and tear, and intentional damage are some common things that are not covered by home insurance," said Linda Chavez, CEO of Seniors Life Insurance Finder in Los Angeles, California.

Riders a factor. Homeowners can purchase specific riders or add-ons to cover these excluded items.

"Those riders cover add-ons or excluded items like flood damage, earthquakes, and intentional damage," Chavez explained. "These riders or add-ons are typically charged separately."

Home condition. Home insurance costs are typically influenced by a home's strength, stability, and condition, particularly in these key areas, according to Chavez.

Home age and condition: Older homes are more expensive to insure because they are more likely to have problems such as wiring issues or outdated plumbing.

Location of the home: Homes in areas prone to natural disasters or crime are more expensive to insure. "This is due to the increased risk of the home being damaged or destroyed," Chavez explained.

Type of home: Some home styles, such as 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 most important factor that can influence a homeowner's insurance rate is how the company is operating in the state where the policy is in effect.

“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," he added, "so if you do see those increases, it's best to shop with an independent agent, get a new A-rated company, and move on."

If you have a claim from a client, that claim may 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.

As a result, before filing a claim, your damage must be significant, according to McCool.

“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 should have an impact on home insurance costs in the future. 

"The Inflation Reduction Act, which was passed this year, could have an impact on home insurance costs in a variety of ways," Chavez explained. "One possible outcome is that more people will install solar panels and other eco-friendly homeowner practices." This would reduce demand for coal and oil, which are used in the generation of electricity."

The Inflation Reduction Act may also encourage more people to insulate their homes. "This would reduce the amount of heat escaping from homes, resulting in lower energy bills," Chavez added.

Keep in mind that the Inflation Reduction Act has no direct impact on insurance costs.

"Homeowners can receive discounts on the cost of upgrading their homes to be more eco-friendly," said Shri Ganeshram, CEO of Awning, a real estate investment firm.

Tips for the Rest of 2022

With summer behind us and colder weather on the way, now is a good time to review homeowners insurance policies, especially since inflation and home prices continue to rise. Insurance experts recommend taking the following steps to complete the task.

#1: Review your policy. As the end of hurricane season, wildfire season, and winter weather approaches, it's critical to review your homeowner's insurance policy to ensure you're adequately covered.

"If you live in a disaster-prone area, review your policy to see what kind of coverage you have and whether it's adequate to protect your home and belongings," Chavez advised.

If you're unsure whether your policy covers natural disasters, ask your insurance company or agent.

"It's also a good idea to keep an inventory of your possessions up to date in case you need to make a claim," Chavez added. "Also, keep track of your premiums and deductibles, as they may vary from year to year."

#2: Consider inflation when choosing coverage. When choosing home insurance, it's critical to consider the possibility of inflation. "The cost of rebuilding your home and replacing your belongings can rise over time," Chavez explained.

To determine how much coverage you require, request a home replacement cost estimate from your insurance company or agent. "This will give you an idea of how much it would cost to rebuild your home from the ground up," she adds, "which can help you choose the right amount of coverage."

#3: Consider combining your auto and home insurance policies with the same company to save money.

"When applied to both the auto and home policies, the discounts from combining can be 10-30%," McCool said. "A policy review will also determine whether or not your home is properly insured." Homes are frequently over-covered and thus cost more for coverage you don't require."

"It's also important to know that policies automatically increase in coverage year after year," he added.

#4: Go ahead and bargain. If you can no longer afford home insurance for whatever reason, contact your insurance company immediately.

“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.”

These policies are typically less expensive than standard homeowners policies, which cover a broader range of perils.

"While a more comprehensive policy would be ideal, if you're really in a pinch, bind, this is a more cost-effective way to cover general catastrophes," McCool explained.

#5: Avoid small claims. Excessive small home insurance claims add up to your claims history, which is one of the most important factors influencing your premium.

"Even if a minor incident is covered," Sundin says, "filing a claim may not be the best option." "The impact of minor claims on your home insurance premium could be far greater than the cost of an out-of-pocket expense."

"Keep in mind that many insurers frequently give customers discounts for being claims-free for a certain number of years," he added.

The Takeaway on Homeowners Insurance Trends Going Forward

The homeowners insurance industry is undergoing significant change and risk. This is primarily due to raging inflation and a tumultuous residential real estate market in the United States.

To stay afloat in a sea of chaos, homeowners should contact their insurance companies and review their policies, and be prepared to shop around if they do not receive the policy they require.

"People should be aware that homeowners insurance costs have risen as the value of the insured property has increased," Ganeshram said. "While many consumers and investors have not yet been affected by rising costs, the majority will renew at the start of the new year, and there may be significant changes."