In an economic climate where a staggering 20 percent of aspiring homeowners doubt their ability to ever afford a home, those who have navigated the complex path to homeownership are now facing a new financial hurdle: soaring homeowners insurance rates. The increased expense has sparked a critical dilemma for some. Should homeowners opt for minimal coverage to ease financial strain even though this approach exposes them to greater risk?
Bankrate delves into this pressing issue, offering a comprehensive analysis of the underinsurance trend. Learn about the driving forces behind the rise in home insurance premiums and measures being taken to address these challenges, plus actionable steps to help mitigate costs without compromising on coverage.
Why are homeowners choosing minimal coverage?
In the face of rising home insurance rates and economic uncertainty, a significant portion of homeowners are gravitating toward minimal coverage options. Compounding the issue, Bankrate’s Annual Emergency Savings Report found more than half of Americans (56 percent) wouldn’t pay for a sudden $1,000 bill from their emergency savings — 35 percent would borrow money, including 21 percent who would finance the expense with a credit card and pay it off over time. This reality is particularly poignant for homeowners, as typical insurance deductibles range from $500 to $2,500 in the event of a covered claim.
For some, the allure of securing lower premiums by forgoing adequate coverage and electing higher deductibles could be a product of financial anxiety, with inflation, rising interest rates and job security concerns exacerbating these pressures. In fact, Bankrate’s Financial Wellness Survey found 52 percent of Americans say money has a negative impact on their mental health, up from 42 percent in 2022.
The decision to opt for minimal coverage — or to skip insurance altogether if your mortgage is paid off — is often a balancing act between immediate financial relief and the potential long-term ramifications of being underinsured. The gamble becomes evident in the face of natural disasters or other unexpected damage. The absence of adequate insurance in such scenarios can lead to financial ruin, far outweighing the short-term savings.
What does it mean to be underinsured?
Even homeowners with an active home insurance policy might not have the coverage they need to financially protect themselves. Whether intentional or not, here are some ways homeowners could be underinsured:
Low coverage limits: Your coverage limits for each coverage type in your policy are generally determined by your insurance company during the quoting process, but you may have the option to adjust these limits. With inflation and rising prices, your existing limits may not be enough anymore.
Missing coverage types: Endorsements are policy add-ons that extend your coverage limits or provide coverage for perils not covered by a standard policy. One key example is flood insurance. Flooding is not covered by a standard home policy. If your home is damaged by a flood and you don’t have a flood policy in place, you would have to pay for those repairs yourself.
Some homeowners may be underinsured to save money while others may not be aware that they don’t have the coverage they need in place. One of the best ways to assess whether you could be underinsured is to speak with a licensed insurance agent. They can help you evaluate your home’s risk exposure and provide insight into what it would cost to rebuild your home and replace your belongings after a total loss. They also will be familiar with the cost of materials and labor in your area.
Why are home insurance premiums rising?
Several critical factors are at play when it comes to rising house insurance costs. Notably, insurers have faced financial strain. According to data from the Insurance Information Institute, companies paid out an average of $1.10 for every $1 in premiums collected in 2023. Additionally, inflation has markedly influenced the average home insurance cost, with the escalating prices of materials and labor for repairs and reconstruction increasing substantially.
No longer confined to traditional high-risk zones, natural disasters are contributing to the spike in premiums, as well. The broadening scope of destructive weather events means that more homes are at risk, necessitating higher premiums to cover the increased likelihood of claims. As affordable coverage becomes more difficult to find, homeowners are left weighing their options, balancing the desire for appropriate types and levels of coverage with the practical need to manage their budgets.
How much is homeowners insurance in 2024?
As of 2024, the average cost of homeowners insurance in the U.S. is $2,151, but individual rates can vary widely depending on several factors. These typically include the home’s location, construction type and age, as well as the homeowner’s claims history and credit history. As noted, home insurance has seen increases in average premiums over the years, likely influenced by a combination of economic circumstances and industry-specific developments like rising material and labor costs.
Below, average quoted premiums sourced from Quadrant Information Services provide a glimpse into insurance rates for homeowners carrying $150,000, $300,000, $350,000, $450,000 and $750,000 in dwelling coverage, providing insight into how coverage limits also influence insurance costs.
Dwelling coverage 2024 avg. home insurance rate
$150,000 $1,274
$300,000 $2,151
$350,000 $2,450
$450,000 $3,046
$750,000 $4,824
Read more: How to estimate your home insurance costs
Bankrate insight
To address the issue of increasing home insurance rates on a legislative level, significant reforms are being made. For example, Florida’s Senate Bill 2-A aims to reduce fraudulent claims, streamline the claims process and mitigate excessive litigation, all of which can lead to higher premiums for homeowners. The establishment of programs like Florida Optional Reinsurance Assistance (FORA) is another strategic move, offering insurers the option to purchase hurricane reinsurance at reasonable rates, potentially preventing cost increases from being passed on to policyholders.
What are the risks of being underinsured?
Being underinsured threatens homeowners’ investment in their property. Imagine, for instance, a quaint, older residence in Ohio that’s demolished by a tornado. Say the property is insured for $150,000 but the actual cost to rebuild in today’s market is $250,000. The homeowners would face a staggering $100,000 out-of-pocket gap. It’s a more prevalent scenario than one might think, with 57 percent of U.S. adults having incurred costs due to an extreme weather event in the last decade, according to Bankrate’s Severe Weather Financial Impact Survey. What’s worse, data suggest disasters like these are increasing in frequency and expense.
Underinsurance doesn’t just apply to the structure of a home but can also extend to its contents, encompassing everything from daily-use items to valuable personal belongings. Selecting the right insurance coverage, therefore, means carefully evaluating rebuild costs and the worth of personal property to make sure both are adequately covered. Liability and loss of use coverage are also worth considering since inflation and rising prices affect everything from the cost of hiring a lawyer to booking a hotel room.
How can homeowners mitigate these risks?
To mitigate the risks of underinsurance, homeowners can take proactive steps to make sure their coverage aligns closely with their actual needs and the value of their property. Here are several suggestions.
Regularly review your policy: Review your insurance policy annually or after making significant changes or improvements to your home to ensure your coverage is up to date and reflects your current needs.
Understand your policy: Familiarize yourself with what your insurance policy covers and what it doesn’t. Clarify terms and conditions with your insurer to avoid surprises when filing a claim.
Assess the replacement cost: Be sure your coverage aligns with the current cost to rebuild your home, taking into account changes in construction costs and building codes. Tools like home replacement cost estimators can provide insight.
Inventory your belongings: Keep a detailed inventory of your possessions with photographs and receipts. This practice helps in accurately determining the value of your personal property and ensuring it’s adequately covered.
Consider additional coverage: For regions prone to specific natural disasters like floods or earthquakes, consider additional coverage since standard policies may not cover these risks.
Improve home security and safety: Enhancing your home’s safety with systems like fire alarms and security systems can improve peace of mind. Plus, you might qualify for home insurance discounts.
Consult with professionals: Speak with an insurance professional to learn the ins and out of your current coverage and coverage gaps and to optimize your policy based on your unique circumstances.
