How Much Home Insurance Do You Need? A Helpful Guide to Estimating Coverage
Whether you're buying your first home or reviewing an existing policy, it's wise to double-check how much home insurance coverage you have – and how much you’ll need as your family's needs evolve.
Understanding home insurance basics
A standard homeowners insurance policy is designed to protect your property against the unexpected. A basic policy will include these six common forms of home insurance coverage:
- Dwelling: Dwelling insurance pays for damages to the actual structure of your home and attached structures, like an attached garage.
- Other structures: Coverage for other structures pays for damage to unattached structures, such as detached garages, fences or gazebos.
- Personal property: Personal property insurance pays to replace damaged or stolen possessions, such as electronics, collectibles or furniture.
- Loss of use: Loss-of-use insurance will pay for the costs of temporary or additional living expenses, in the event your home is uninhabitable after a covered loss. For example, if your house is damaged in a fire, you can use loss-of-use coverage to pay a portion of your hotel stays and meals until the home is repaired.
- Liability: The liability portion of homeowners insurance pays for injuries or property damage experienced by others. For example, if your dog bites a guest, your liability coverage helps pay for medical expenses due to the injuries and related legal fees.
- Medical payments: If someone visits your property and is hurt — for example, if they slip and fall in your backyard — medical payments insurance can pay for their treatment expenses.
How to estimate the right coverage for your home
It can be intimidating to calculate how much home insurance coverage you need. However, the process is less complex than you might expect.
In most cases, your policy is based around your dwelling coverage – how much it costs to rebuild your home. That amount, in turn, is also used to determine the limits for the other coverage you need, such as that for the contents of your home.
Here’s how that baseline dwelling coverage is determined, and how other coverages are calculated in relation to that number.
Determine your home's rebuilding cost (Coverage A)
Dwelling coverage, sometimes called Coverage A, refers to the cost to rebuild your home to its current condition. It’s not based on what you paid for the property – which, of course, is most often a lower figure than the current value.
The replacement cost is based on several factors, including the square footage of your home, local building costs, materials and any special features – such as recent renovations or additions.
Account for other structures on your property (Coverage B)
Coverage for other structures, or Coverage B, can pay to replace that beautiful gazebo or pergola you installed, were such an addition destroyed. The maximum level of Coverage B is usually set at 10% of your dwelling coverage. For example, if the replacement cost of your dwelling is $300,000, then the maximum amount of coverage for other structures would be $30,000.
If you've splurged on customizing your property with an elaborate outdoor kitchen, custom shed or cedar fence, you may need to talk to your insurer about increasing the coverage limit.
Value your personal belongings (Coverage C)
Personal property coverage, or Coverage C, is for your furniture, clothing, electronics and other items. Depending on your policy, the maximum amount for which you can insure your belongings ranges from 40% to 75% of your dwelling coverage.
With most policies, you have actual cash value (ACV) coverage, which pays what your items are worth today at their depreciated value. But you may be able to upgrade to replacement cost coverage at an additional cost. With this form of coverage, your insurance company will replace your worn or damaged items with brand-new stuff.
Taking a home inventory, including capturing photos and making a walk-through video, is a great way to keep track of your belongings, and it will make it easier to file a claim.
Plan for temporary housing needs (Coverage D)
If your home is significantly damaged and it's not safe to stay there, Coverage D helps you cover hotel stays or rentals. The coverage limit is usually about 30% of the rebuilding cost (that is, of the Coverage A total).
Protect against liabilities (Coverages E and F)
Your home insurance policy can protect your assets if someone is hurt on your property or if you accidentally cause damage to someone else's property.
With personal liability insurance, or Coverage E, you can usually choose a coverage limit between $100,000 and $500,000.
For medical payments coverage, or Coverage F, the typical range for policy limits is $1,000 to $5,000.
Optional coverages and special considerations
The coverage components, from A through D, may not be all you want or need from your homeowners insurance. You can choose to adjust your coverage limits if you need protection for certain items that’s above and beyond additional protection. Here’s some of the additional coverage you might buy:
Extra protection against rising building costs
As noted above, you might have chosen replacement cost coverage for the contents of your home, to avoid receiving an amount lower than you’d need to buy your lost items new. You can also adjust your coverage for rebuilding your home to account for changes in pricing for labor or materials. When you add extended replacement cost coverage, your insurer will pay 10% to 30% more than your dwelling coverage limit to cover inflation or spikes in local construction costs.
Schedule high-value personal items
Your personal belongings coverage (Coverage C) may have relatively low coverage limits for certain categories of items that can be very expensive. For example, your insurer may only cover up to $1,500 in lost jewelry. As a result, if you have a lot of valuable jewelry, a fine art collection, rare baseball cards or other collectibles, you may need a scheduled personal property endorsement to ensure you have enough coverage. These endorsements will reimburse you for the full appraised value if items are damaged, stolen or vandalized, often without a deductible.
Consider a personal umbrella policy
If you have a pool, trampoline or frequently host guests — and therefore are at a higher risk of liability — you may need more than the liability limit allowed under your regular homeowners policy. A personal umbrella policy can add $1 million or more in extra coverage, perfect for those who have a riskier property and substantial assets to protect. (The policy will also extend to your car insurance, and provide additional protection against claims on that policy that might exceed its liability limits.)
Add protection for natural disasters
Some damages related to natural disasters, such as floods and earthquakes, aren't covered under a typical homeowners insurance policy, so you'll need a separate policy if your home is in an area prone to those events. Flood insurance is sold under the federal National Flood Insurance program and by select private insurers. Earthquake insurance is sold by some regular homeowners insurance companies, as well as by other public and private entities.
Keep your coverage up to date
Over time, your finances and property may change, so your insurance policy should change, too. Once a year, sit down and consider your home and how it might have changed. Ask yourself the following questions:
- Have there been any changes to the property? If you remodeled a kitchen, added a bedroom or installed a new fence, you may need a higher coverage limit.
- Have I added to my collection? If you're a collector and have expanded your collections with new artwork or other items, you may need an insurance rider – or an upgrade to an existing rider – to adequately protect your valuables.
- Do I have enough liability coverage? If your assets or net worth have increased, you may need extra liability coverage or an umbrella policy for peace of mind.
- Is my home inventory up to date? If it's been a while since you updated this document, make a new one, adding any purchases of televisions, laptops, furniture or other items, along with photos and video.
It's a good idea to make an appointment with your insurance representative to have a personalized insurance evaluation so that you're appropriately protected.
This story was created in partnership with Money.com.
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