You need to understand your homeowners Insurance policy increases and replacement cost endorsement.
The replacement cost endorsement for your home insurance policy may seem redundant when your policy increases the coverage on your home every year. However, they are actually responsible for two different things and are very necessary.
The increase on the coverage is designed to be for a cost of living adjustment. Various items get more expensive each year and therefore your homeowner’s policy takes this into consideration. It ensures that when you go to buy a new couch that you are actually able to do so based upon the amount that a similar one would cost you in today’s market.
The replacement cost endorsement is not just for the belongings within your home but your home itself. In the event of a major catastrophe, such as hurricane, tornado, or fire where your home is destroyed, you need to know the real cost of having it repaired and/or replaced.
If you didn’t have the endorsement, then you are trusting the homeowner’s policy to know what the value of your home is and the increases may not be sufficient based upon the reality of the real estate market. The more accurate you can be with the cost of things, the better you can protect yourself so if you do have to file a claim, you are getting the most amount of money for it.
Leaving things up for chance is dangerous. It’s one thing to have the insurance company estimate the cost of living so you can replace couches, chairs, and bedding, but something very different for the replacement of your home. If you live in a market that has been increasing in home values rapidly and not at the same rate as the cost of living adjustments, then the replacement cost endorsement is your only form of protection and therefore very important.
It may be a formality, but it’s still a formality that is to your benefit. The endorsement combined with the increase is for your protection.