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Exactly what home insurance coverage does inflation guard apply to?

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Published on April 16, 2021. EST READ TIME: 3 minutes

Manoj Rai bought his dream house in a posh Gurgaon neighbourhood a few years ago. He also purchased a home insurance policy to add another layer of protection to his savings, especially because he didn’t have much left over after buying the house. During the last monsoon season, his locality was flooded, and a portion of his house and many of its contents were badly damaged.

Manoj’s insurance covered the cost of the damage, but he still had to use his savings to get his house back in shape. Why? Because he had not opted for Inflation Guard, his policy proved inadequate as construction and repair costs had risen considerably in recent years. Manoj discovered the importance of additional coverage the hard way. If you don’t want to be in his shoes, keep reading to understand what this Inflation Guard is.

1. What is Inflation Guard in Home Insurance?

The premium of the home insurance policy is determined by a number of factors, including the value of the property, the condition of the house, claim history, the climatic condition of the area, and crime rate in the locality. But there is one more important factor to consider, and that is inflation.

Construction and repair rates in the area may rise each year as it undergoes more infrastructural development and beautification, or simply because of the economy. Inflation may cause raw materials to become more costly or workers to charge higher wages.

Keeping this factor in mind, insurance companies include a provision in the homeowner's insurance policy that automatically adjusts the coverage limit to reflect current construction costs during each renewal period.

Even if you don’t make any upgrades or renovations, the coverage of your home insurance should grow over time. The change is necessary to keep up with the rising cost of materials and labour.

2. Inflation Guard and its relation with home insurance coverage and premiums 

Well, Manoj’s story is a fine example of what a home insurance policy without an Inflation Guard can lead to. Being underinsured can result in significant financial loss. The trusted insurer is better positioned to forecast how much your coverage needs to rise annually to keep pace with inflation.

However,as a policyholder, one valid question may be how much extra premium you must pay. While inflation adjustments are usually 4% to 8% annually, home insurance premiums will only increase by 2% to 4%. Needless to say, it will vary from one insurer to the next and from one location to another.

A lot of things mentioned in your insurance policy may be affected by inflation and must keep up with it. The list includes the house structure, contents, and even expenses coverage for additional accommodation if you are unable to live at home due to damage. However, before purchasing Inflation Guard, do check with the insurer about the scope of its coverage.

3. Misconceptions regarding Inflation Guard

One of the most common misconceptions is that the Inflation Guard will automatically cover the damages even if you have made renovations or other improvements to your home. An insurance policy is drafted according to the present state of the house, and if you decide to upgrade it, you must inform the insurer first.

The Inflation Guard, as its name clearly suggests, protects you against the rising costs that are beyond the control of any policyholder. However, if the value of your house increases because of your actions, you must consult with your insurer and decide on the new scope of coverage, as well as a premium increase.

Conclusion

Owning a home is a dream for many in the country, and with years of savings and financial planning, people can realise that dream. But we must also protect it after we have it. Purchasing a home insurance policy is the best way to do so.

While policyholders consider various risks to their home, they overlook inflation. Imagine discovering that your insurance coverage is insufficient to cover the cost of rebuilding or renovating your house because construction material prices have increased exponentially since you bought the insurance.  What an epic disappointment that would be! Therefore, choose Inflation Guard when renewing your policy.

Disclaimer:  The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.