How Much Homeowners Insurance Do I Need?
Your home is your most valuable asset and probably the largest single investment you’ll ever make—so there’s no question that it’s worth protecting. Homeowners insurance can protect your property and belongings in the event of a disaster and cover your cost of living while you’re out of your home during repairing or rebuilding. It can also shield you from liability expenses if anyone gets injured on your property. Getting insured by a high-quality home insurance provider that fits your unique needs can guarantee that you would be financially supported if your home or belongings were damaged.
Not all states require homeowners insurance, but that doesn’t mean you shouldn’t have it. Many mortgage lenders do require homeowners to have home insurance and set minimum requirements. But is that enough to safeguard your home and everything inside of it?
The This Old House Reviews Team has compiled an extensive guide to just how much homeowners insurance coverage you need in order to protect yourself. Read on to find out the amount of coverage you need, including dwelling coverage, personal property coverage, liability coverage, and additional living expenses coverage.
This type of coverage protects you against the ultimate cost of repairing or rebuilding your home to its structure prior to when the disaster took place. Standard coverage includes damage from fire, lightning, explosions, and hail. If you live in an area prone to flood or earthquakes, you might need to buy additional coverage for the structure of your home, as that is not included in basic policies.
Key takeaway: You need enough dwelling coverage to equal the total replacement cost of your home.
Determining the exact amount of insurance you need takes some research and calculations. Homeowners simply can’t look to the price they originally paid for their home, or the current market price, since it may cost more or less to actually rebuild the home.
Here are some of the factors you need to consider when evaluating how much dwelling coverage you need:
- Local construction costs
- The structure’s square footage
- Current rebuilding costs
- The style of the home
- The home’s exterior wall construction
- The number and type of rooms
- The roof type and materials
- Other structures—garages, etc.
- Customized features
Calculating the Cost
To get a rough estimate, multiply the home’s square footage by the local building cost per square foot, which you can find out from contacting an insurance agent or builders association.
You should take extra steps to further refine the estimate. Look for an online calculator to create an estimate and follow up by contacting an independent insurance agent.
If you want greater coverage, an extended replacement cost policy endorsement increases dwelling coverage by 25-50% of your underlying policy limit. Increased rebuilding costs can be offset by purchasing an inflation guard clause, which adjusts the dwelling coverage limit to match current construction costs whenever you renew your insurance.
In addition, building codes may have changed since your home was originally built or recently modified. When your home is rebuilt, it will need to adhere to the current codes—and typical dwelling coverage does not factor that in. You can purchase an ordinance for your policy, which pays a specific amount toward bringing the home up to code.
Personal Property Coverage
According to the Insurance Information Institute, most home insurance policies provide coverage for personal belongings at a rate of 50-70% of the insurance on the dwelling. However, that is not necessarily enough. Personal belongings apply to furniture, appliances, electronics, sports equipment, clothes, and even the food in your refrigerator if they are stolen, destroyed, or vandalized.
Key takeaway: You need enough personal property coverage to replace all of your personal belongings.
To determine the amount of coverage you need, start by conducting a thorough home inventory of your personal possessions. Create a detailed list, which can also help streamline the claim process in the future. Catalogue your more valuable personal belongings with photos.
You have the option to either insure your personal belongings for actual cash value, which means the policy would pay out less for older items compared to the price they were when you bought them, or the replacement cost, which is roughly 10% greater.
Homeowners insurance policies have limits on the amount they will cover for expensive items like jewelry, furs, collectibles, silverware, and—in some cases—computers. This limit is often about $2,000. If your total value is greater than $2,000, you can defray some of the cost by purchasing a personal property floater, which will allow for higher coverage limits.
This type of coverage protects you against costs associated with bodily injury or damages that you, your family members, or your pets cause other people while they are on your property, including medical bills, court costs, and damages awarded.
Liability can cover anything from dog bites to home accidents, intoxicated guests, falling trees, and injured domestic workers.
Key takeaway: You need enough liability coverage to protect your assets, or as much as you can afford.
The majority of homeowners insurance policies include a minimum of $100,000 of liability coverage, but you can purchase additional coverage up to $300,000 or more. You should consider purchasing as much coverage as you can because if you are sued for injury or harm that is caused on your property, the individual suing you can come after your personal assets. If your assets, investments, or savings exceed the liability limits in your policy, you should consider purchasing excess liability or an umbrella policy.
Once the underlying policy’s liability insurance has been used up, the excess liability coverage policy will start to pay out. This policy offers an increased dollar amount of coverage, as well as broader coverage.
The amount you pay for an umbrella policy will depend on the degree of underlying insurance and the degree of risk. The more underlying liability coverage, the cheaper the umbrella policy will be.
Additional Living Expenses Coverage
Additional Living Expenses, or ALE, cover the expenses if you can’t live in your home due to an insured disaster. ALE will cover the costs of temporarily residing elsewhere, including hotel bills, restaurant meals, the cost to board your pet and do laundry, and more, while your home is being repaired or rebuilt.
Key takeaway: You need enough ALE coverage to reimburse your living expenses after the loss of your home.
A typical amount of ALE coverage is roughly 20% of your dwelling coverage, but you may want more, especially if you have a large family or you live in an expensive area where renting may be costly.
ALE coverage limits vary depending on the company. Some company’s policies place limits on the amount of coverage, while others offer unlimited coverage for a specific window of time. Many companies allow you to increase your ALE coverage by paying for an additional premium.
How do I know how much homeowners insurance I need?
Look into each type of coverage individually. For dwelling coverage, consider new building codes and any increased costs of labor in the area. For personal property coverage, take inventory of your possessions, paying special attention to valuable items. For liability coverage, consider whether you entertain often or have any hazards in your yard. For ALE coverage, research how expensive renting is in your area.
How much homeowners insurance is required for a mortgage?
This will depend on your personal financial information and lender.
What is not protected by most homeowners insurance?
Traditionally, homeowners insurance does not cover flood insurance or earthquake insurance.
Do I need homeowners insurance if my home is paid off?
You are not required to have homeowners insurance in this instance, but it is highly recommended to protect your home, belongings, and more in case of disaster.
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