Insurance inflation protection is not an insurance policy or coverage you can obtain but a policy feature. Better defined, it is a percentage that insurance policies include to protect the insured against inflation and its possible effect on the coverage amount they have available at the time of the loss.
So how does it actually work? Here can be the situation: A home is built and costs $250k to construct, notwithstanding the cost of the land. It is insured for $250k in good faith. However, over the first policy year inflation is 9%, meaning that the home should have been covered for $272,500. Through no fault of the client, they are inadvertently underinsured! This has happened more times than can be counted, but the industry came up with a viable solution: Inflation Guard! The inflation guard is commonly placed at 4% or 8%, but higher options can often be easily obtained. Here is how it works: If the client had insured this same home for $250k and had selected an 8% Inflation Guard, then instead of waiting the entire policy period (one year in most all cases) to increase the “Dwelling replacement cost” in accordance with the Consumer Price Index (https://www.bls.gov/cpi/) as is normal, by selecting 8% in advance, then quarterly, the $250k is incrementally bumped up to increase the likelihood that the home is insured adequately. Example follows:
The home was written at $250k on January 1st.
On April 1st the home is increased by 2% from the original $250k to make the dwelling coverage $255k.
On July 1st the home is increased another 2% of the original $250k to make the dwelling coverage $260k.
On October 1st the home is increased another 2% of the original $250k to make the dwelling coverage $265k.
On January 1st, when the policy renews for the first time, the final 2% is added, to make the dwelling coverage $270k.
I hope this makes sense. It is a fantastic comforting consideration for clients and helps agents rest in that by recommending this small tweak in coverage that they cover their clients’ homes better, and reduces anyone’s exposure to a home that is inadvertently underinsured, making desperate decisions necessary.
Make sense? Call us to discuss. If it does not make sense, call us quickly! Thank you. It’s our honor to work for you.