If reviewing your home insurance policy isn’t on your financial checklist, now might be a good time to add it. Although inflation has slowed, rebuilding costs increased from 2023 to 2024, according to a recent analysis from Verisk. Costs are expected to keep rising until at least April 2025. If you haven’t checked on your home insurance policy in a while, these higher prices could leave you in a financial bind if you need to file a claim.
What are reconstruction costs?
Reconstruction costs measure how expensive it is to rebuild or repair your home. Also referred to as rebuilding costs, reconstruction costs are not the same as your home’s assessed value or the purchase price. Reconstruction costs take into account building materials — like concrete and lumber — and labor. When the price of raw materials and labor increases, reconstruction costs usually go up as well.
States where reconstruction costs went up
Nationally, residential reconstruction costs increased 4.2 percent from October 2023 to October 2024. Costs went up in all 50 states, but some states saw higher increases than others. Residential reconstruction costs increased the most in New Hampshire, Nebraska and Kansas, increasing 7.7 percent, 6.4 percent and 6.2 percent, respectively. Colorado, Nevada, Washington, Montana, Idaho, Minnesota and New York also experienced increases of at least 5 percent year over year.
Why do rebuilding costs matter for home insurance?
For most, homeowners insurance is probably something you hope you never need to use — but that doesn’t mean you won’t have to. Of course, it’s ideal if the coverage you need is there when you need it.
One of the most important parts of a home insurance policy is dwelling coverage, or Coverage A. The dwelling portion of your policy covers your home’s physical structure: the roof, foundation, floor, windows, walls and so on. When your home sustains damage or is completely destroyed by a covered policy peril, dwelling coverage is what helps pay to repair or rebuild your home.
If your dwelling coverage is insufficient — due to rising construction costs or something else — you’re responsible for covering the remaining expenses to rebuild. You can find your dwelling limit, as well as other important coverage limits, on your policy’s declarations page.
Minimum home insurance limits: The 80% rule
If you used a mortgage to purchase your home, your lender will likely require you to insure your home for at least 80 percent of what it would cost to replace it. You typically can’t insure it for less than that without being penalized by your mortgage company. Most insurers will also require your policy to cover at least 80 percent of its replacement cost. If not, your insurance company may only pay a percentage of your claim in the event of damage. However, not every insurance provider adheres to this rule. Regardless of whether you have a mortgage or own your home outright, most experts suggest insuring your home at its full replacement cost to better protect your finances.
Is market value the same as replacement cost?
No, they are not the same thing. Market value represents what a home would sell for, and accounts for factors like market fluctuations, supply and demand, the value of the land your home sits on and more. Replacement cost pertains only to construction costs, which include labor and raw materials. What you paid for your home is not always a good guidepost for what your dwelling limit should be. Speaking with a licensed insurance agent can give you a better idea of your home’s replacement cost estimate, which can shed light on how much coverage you actually need.
Is your current coverage lacking?
If you purchased a home several years ago and haven’t touched your policy since, rising rebuilding costs could mean you’re currently underinsured. In fact, Bankrate’s Extreme Weather Survey found that only 29 percent of U.S. homeowners made a change to their insurance policy within the last five years as a precautionary measure.
Rising labor and commodity costs have been a big driver of the escalating price tag of construction and home improvement projects. The replacement value you need in a homeowner’s policy has gone up noticeably as a result.
— Greg McBride, CFA, chief financial analyst for Bankrate
To be sure, higher home insurance costs can deter homeowners from updating their policies — broader coverage usually means a higher premium. When a home insurance policy with a $300K dwelling limit already costs nearly $2,200 per year on average, it can be tempting to choose lower coverage limits to save money upfront. But, when you weigh what you’d pay for higher coverage limits and how much extra coverage you get, the tradeoff could be worth it — especially in an era when extreme weather events are becoming more common.
| Dwelling limit | Average cost | Price difference from $300K policy | Coverage difference from $300K policy |
|---|---|---|---|
| $350,000 | $2,430 | +$249 | +$50,000 |
| $450,000 | $2,934 | +$753 | +$150,000 |
| $750,000 | $4,189 | +$2,008 | +450,000 |
Extreme weather concerns for homeowners
Natural disasters wreaking havoc on homes are increasingly likely scenarios. In a study conducted by the U.S. Department of the Treasury, from 2018 to 2022, the annual number of major disaster declarations for climate-related events was almost double the annual average over the 50-year period from 1960 to 2010. And there’s not much relief in sight: A 2023 report from CoreLogic predicted that, by 2050, warmer sea surface temperatures will allow hurricanes to travel further inland.
Another report from Realtor.com stated that more than 44 percent of homes in the U.S. face at least one type of severe or extreme climate threat, including floods, wind, wildfires, heat and air quality. With extreme weather events on the rise, it’s imperative that your home insurance policy can cover the full cost of rebuilding your home.
How to prevent underinsurance
You can’t control the weather or construction costs, but you do get a say in your home insurance policy. These steps can help you avoid underinsuring your home:
- Ask about an inflation guard endorsement: An inflation guard endorsement automatically increases your home insurance coverage limits to keep pace with inflation. It can come standard on some, but not all, home insurance policies. If it didn’t come included, you can usually add it to your policy for an extra cost.
- Look into extended or guaranteed replacement cost coverage: Extended replacement cost can add an extra 10 to 50 percent to your dwelling limit, so you don’t have to dip into your own pocket to cover the cost of repairing or rebuilding your home. Guaranteed replacement cost can cover the entire cost of rebuilding your home, regardless of your dwelling limit. Extended replacement cost may come standard with your policy, or it can be purchased as an add-on. If you want guaranteed replacement cost and your insurer offers it, you’ll need to add it via endorsement.
- Account for larger home renovation projects: You probably don’t need to tell your insurance company that your bedroom has a fresh coat of paint. But for larger and more expensive projects like a new kitchen, upgraded deck or finished basement, you should tell your home insurance company and adjust your dwelling limit accordingly.
- For older homes, consider an ordinance or law endorsement: If your home is older and not up to current building codes, it could cost more to replace it after a covered loss. An ordinance or law endorsement can help pay for the extra costs of getting your home up to code. It may already be included in your policy; if not, you can usually add it as an endorsement.
- Schedule a call with your insurance company to review your dwelling limit: You may not know off the bat exactly what it would cost to replace your home fully. But, a licensed agent would know. Set up some time to chat with someone from your insurance company ahead of your policy renewal date to make sure your home is fully covered.
Methodology
Bankrate utilizes Quadrant Information Services to analyze January 2025 rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Quoted rates are based on married male and female homeowners with a clean claim history, good credit and the following coverage limits:
- Coverage A, Dwelling: $300,000, $350,000, $450,000, $750,000
- Coverage B, Other Structures: $30,000, $35,000, $45,000, $75,000
- Coverage C, Personal Property: $150,000, $175,000, $225,000, $375,000
- Coverage D, Loss of Use: $60,000, $70,000, $90,000, $150,000
- Coverage E, Liability: $500,000
- Coverage F, Medical Payments: $1,000
The homeowners also have a $1,000 deductible, a $500 hail deductible and a 2 percent hurricane deductible (or the next closest deductible amounts that are available) where separate deductibles apply.
These are sample rates and should be used for comparative purposes only. Your quotes will differ.
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