Risk & Protection
Why Older Homeowners Are the Most Underinsured, and What to Do About It
Older homeowners, particularly those who purchased their homes more than ten years ago and have not recently updated their coverage, are statistically the most likely to be underinsured. Rising construction costs since 2020 have significantly increased replacement values, while many homeowners' policies have not kept pace, creating a gap that can exceed six figures.
By Rich Arzaga, CFP®, CCIM
The Real Estate Whisperer® Financial Planning
| 4 min read
I talked with a woman in her late 60s last year who had owned her home for 28 years. Paid off. Well-maintained. She was proud of it, rightfully so. When I asked her about homeowner's insurance, she mentioned the name of the company but couldn't tell me off the top of her head what her dwelling coverage limit was. She thought it was around $300,000.
We looked it up. It was $280,000. And a local contractor had recently told her that rebuilding the house from scratch would cost approximately $480,000.
The Replacement Cost Gap
Construction costs have surged since 2020, labor shortages, material prices, and supply chain disruptions have permanently reset what it costs to build in most U.S. markets. Policies purchased before 2020 that use a "guaranteed replacement cost" endorsement may be fine. Policies with a fixed dwelling limit, and no automatic inflation adjustment, may be dramatically out of date.
The home you insured in 2015 may cost nearly twice as much to rebuild in 2026. Has your coverage kept pace?
Why Older Homeowners Are Especially Vulnerable
Older homeowners tend to set their insurance and not revisit it for years. They're not shopping around annually the way a younger buyer might. Many also have custom features, additions, upgraded kitchens, finished basements, that were added over the years but never reported to the insurer and therefore not reflected in the coverage limit.
At the same time, the stakes are higher. For someone in their 60s or 70s, a major underinsurance gap isn't just a financial inconvenience, it could mean using retirement savings to bridge the difference, or not being able to rebuild the home at all.
Three Things to Check Right Now
First, pull your declarations page and look at your dwelling coverage limit. Compare it to what local builders say new construction costs per square foot in your area (often $200, $400+ per square foot depending on region and finish level). If the math doesn't add up, you have a gap.
Second, ask your agent about a replacement cost appraisal or whether your policy includes guaranteed replacement cost coverage, which pays to rebuild regardless of the stated limit. Third, review whether improvements made in the last ten years are included in your coverage.
Underinsurance isn't discovered when you pay your premium. It's discovered when you file a claim, and that's the worst time to find out.
The Cost of Getting This Right Is Small
Increasing your dwelling coverage limit is typically one of the cheapest changes you can make to a homeowner's policy. The delta in annual premium to add $100,000, $200,000 of coverage is often surprisingly modest compared to the protection it provides.
Frequently Asked Questions
- What does it mean to be underinsured as a homeowner?
- Being underinsured means your homeowner's insurance coverage limit is less than the actual cost to rebuild your home. If a total loss occurs, you'd be responsible for the difference between your coverage limit and the actual reconstruction cost.
- Why are older homeowners more likely to be underinsured?
- Older homeowners often set their coverage years ago and haven't revisited it. Rising construction costs since 2020 have increased replacement values significantly, and home improvements made over the years may not be reflected in the policy's coverage limit.
- How do I know if my home is underinsured?
- Compare your dwelling coverage limit on your declarations page to the estimated replacement cost. Ask local contractors for current per-square-foot construction costs in your area and multiply by your home's square footage. If your coverage falls short, contact your insurer.
- What is guaranteed replacement cost coverage?
- Guaranteed replacement cost coverage pays the full cost to rebuild your home after a covered loss, regardless of the stated coverage limit. It protects against underinsurance caused by rising construction costs. Not all policies include it, ask your agent.
About Rich Arzaga, CFP®, CCIM
Rich Arzaga is the founder of The Real Estate Whisperer® Financial Planning and creator of The Real Estate Income Lab® and The 5% Real Estate Performance Gap®. He provides comprehensive, flat-fee financial advice that brings investment real estate together with retirement, investments, taxes, insurance, estate planning and the rest of a client's financial life.
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