Inflation: A hidden factor affecting insurance costs
Inflation is an economic phenomenon that silently erodes the purchasing power of money over time. While it may seem unrelated to insurance at first glance, inflation plays a significant role in the risk of not being fully covered by insurance, particularly when it comes to auto and homeowners insurance.
The impact of inflation on auto insurance
When considering car insurance, inflation impacts two main areas: the cost of vehicles and the cost of repairs.
As inflation rises, so does the price of new and used cars. If your car insurance policy doesn't account for this increase, you could find yourself underinsured if your vehicle is totaled in an accident.
Similarly, the cost of car parts and labor for repairs typically increases with inflation. An accident that would have cost $500 to repair a few years ago might now cost $700 or more. If your insurance coverage hasn't kept pace with these rising costs, you could be left paying the difference out of pocket.
Inflation's effect on homeowners insurance
In the realm of homeowners insurance, inflation can significantly impact the replacement cost of your home. Over time, the cost of building materials and labor rises due to inflation.
This means the amount it would cost to rebuild your home today could be significantly higher than when you originally purchased your insurance policy. If your homeowners insurance doesn't include an inflation guard, which automatically adjusts your dwelling coverage each year to account for inflation, you could be underinsured. This could result in substantial out-of-pocket expenses if you need to rebuild your home after a covered loss.
The importance of keeping pace with inflation
As a savvy consumer, it's essential to understand how inflation affects your insurance coverage. Regularly reviewing and adjusting your policies can help ensure your coverage keeps pace with rising costs.
Consider policies that offer inflation protection. For instance, some auto insurance policies include an option for new car replacement coverage, which can provide you with the money to buy a new car if yours is totaled in a covered claim. For homeowners insurance, look for policies with an inflation guard.