How Much Homeowners Insurance Do I Need? Your home may be your largest investment; ensure that it is adequately protected.
If you own a home, you may be wondering how much homeowners insurance you really need. After all, the more coverage you have, the higher the premiums—and you probably don’t want to pay more than you have to. Still, if you don’t have enough coverage, will you be able to rebuild your home and replace your belongings if a disaster strikes?
The good news is that you can tailor your homeowners insurance policy to ensure you have the right type—and amount—of coverage.
KEY TAKEAWAYS
- Homeowners insurance protects your assets from liability claims and covers losses and damages to your home and belongings.
- Because standard policies do not cover everything, you may require additional coverage to protect against perils such as floods and other natural disasters.
- Your insurance agent can assist you in determining the type and amount of coverage you require.
What Is Homeowners Insurance?
A home is most likely the largest single purchase you will ever make, so it stands to reason that you would want to protect that investment. One way to do so is to stay on top of the inevitable repairs and maintenance that keep your home in good shape. Another option is to purchase a good homeowners insurance policy.
Homeowners insurance is a type of property insurance that protects your home and other valuable items. A standard policy will cover damage and losses to your home and personal belongings. It also protects your assets from liability claims such as personal injuries and pet-related incidents.
Coverage for Homeowners
Each insurance policy covers different “perils”—the mishaps against which you are protected. According to the Insurance Information Institute, some of the most common perils covered by standard homeowners policies are:
- Damage caused by an aircraft, car, or vehicle
- Explosions
- Objects in the air
- Fire and smoke
- Lightning strikes
- Riots or civil unrest
- Theft
- Vandalism and malicious mischief
- Volcanic eruptions
- Water damage (from within the home only)
- The weight of ice, snow, and sleet
- Windstorms and hail
While standard policies cover many different perils, they do not cover everything, including:
- Floods. Flood insurance is specifically excluded from standard policies, so you must purchase it separately. Even if you do not live in a flood plain, you should consider flood insurance: 90% of natural disasters in the United States involve some form of flooding.
- Earthquakes. Earthquake coverage is typically available as a separate policy or as an endorsement to your existing homeowner’s coverage.
- Damage from routine maintenance. Mold, termite and pest infestations, and damage caused by a lack of maintenance are not covered by homeowner’s insurance.
- Sewer backup. Sewer backups are not covered by standard policies or flood insurance. Coverage is typically available as a separate policy or as an endorsement.
How Much Homeowners Insurance Do I Need?
According to Insurance.com, if you have a mortgage, your lender will require a certain amount of dwelling and liability coverage. This coverage protects both your investment and your lender’s.
Important: According to CoreLogic, approximately 60% of all homes in the United States are underinsured by an average of 20%.
If you don’t have a mortgage, you don’t need homeowners insurance. Of course, while coverage is technically optional, it would be extremely risky to leave what is likely your most valuable asset unprotected. Instead, a good rule of thumb is to have enough homeowner’s insurance to:
- Rebuild your house
- Replace your belongings
- Cover injuries and damages that occur on your property.
- Reimburse your living expenses while you are unable to live in your home.
Standard homeowners insurance policies provide four types of coverage to help you achieve these objectives: dwelling coverage, personal property coverage, liability coverage, and additional living expenses coverage.
Dwelling Insurance
Coverage should be equal to the replacement cost of your home.
Dwelling coverage is the portion of your homeowners insurance policy that pays to rebuild or repair your home and any attached structures—such as a garage, deck, or front porch—if they are damaged by a covered peril.
Ideally, your dwelling coverage should equal the cost of replacing your home. This should be based on rebuilding costs rather than the value of your home. The cost of rebuilding may be higher or lower than the original price, depending on location, the condition of your home, and other factors.
Your insurance agent or an appraiser can calculate rebuilding costs for you. Alternatively, you can estimate the cost by multiplying your home’s square footage by the local building cost per square foot for your type of house. For example, if your home is 2,000 square feet and local building costs are $100 per square foot, it would cost around $200,000 to replace it. A local real estate agent or appraiser should be aware of the average building costs in your area.
Coverage for Personal Property
Recommended coverage: enough to replace all of your belongings.
Personal property coverage extends to everything in your home other than the house itself, including appliances, clothing, furniture, electronics, sports equipment, toys, and even the food in your refrigerator. The coverage kicks in if your belongings are destroyed, stolen, or vandalised.
In general, you should have enough coverage to replace all of your belongings. This amount can be difficult to estimate because most people have no idea how much stuff they actually own. Make an inventory of everything you own: make a detailed list of what’s in each room and take photos of the more expensive items.
If you own expensive or rare items, such as jewellery, musical instruments, high-end sports equipment, or valuable art, you may require additional coverage. Make a separate inventory of these items, estimate their replacement costs, and ask your insurance agent if you need additional coverage for them.
Liability Insurance
Recommended coverage: As much as you can afford
Liability coverage is the portion of your homeowners policy that kicks in if someone is injured on your property. According to NetQuote, five common liability claims that homeowners face are:
- A dog bites. Some dog breeds are considered high risk and are not covered by standard policies. Check with your insurance agent if you have a pit bull, Akita, German shepherd, or any other potentially dangerous dog breed. Check to see if you are covered if your dog bites someone who is not on your property, such as at a park.
- Home Mishaps Even if someone enters your property without your permission and is injured, you are liable.
- Trees that are falling. You may be held liable if a tree on your property falls and injures someone or damages a car or neighbor’s home.
- Guests who are inebriated If one of your guests becomes intoxicated, you may be held liable for any harm that person causes to other people or property.
- Domestic Workers who were injured. If you hire people to clean your house or mow your lawn, you may be held liable if they are injured on the job.
Most homeowners insurance policies include at least $100,000 in liability coverage. It’s a good idea to increase that to at least $300,000—or even more if you can afford it.
If you require liability coverage that extends beyond your homeowners insurance policy, you can purchase an umbrella insurance policy. This is especially important if you have a high net worth or a higher-than-average risk of being sued (for whatever reason), work from home, or serve on a board of directors.
Additional Living Expenses (ALE) Protection
10% to 30% of your total dwelling coverage is recommended.
If your home was destroyed by a fire or tornado, it could take months or even years to rebuild. Where would you live in the meantime?
Additional living expenses (ALE) coverage is a component of your homeowners insurance that acts as an emergency fund if you are temporarily displaced from your home. It covers things like staying in a hotel or the additional costs of eating out when you can’t cook at home. ALE coverage may also reimburse you for the costs of doing laundry, renting furniture, storing household items, and boarding your pet.
According to Insurance.com, most homeowners insurance policies calculate your ALE as a percentage of your dwelling coverage (typically 20%). If you have a large family (and a lot of mouths to feed), you should choose the higher coverage if possible.
The Bottom Line
Consult with your insurance agent to determine whether you have the proper type and amount of homeowners insurance coverage. It is not always as expensive as you might think to upgrade from a mediocre policy to excellent coverage that will keep you safe (and let you sleep at night).
