How Much Homeowners Insurance Do You Need?

How to Calculate How Much Homeowners Insurance You Need

Standard homeowners insurance includes four basic types of coverage:

1. Liability coverage if a visitor to your home is injured on the property
2. Dwelling coverage to repair or rebuild the structure of your home
3. Personal property coverage for possessions, such as furniture and clothing
4. Additional living expenses (ALE) coverage to pay for living elsewhere during home repairs

Standard home insurance does not cover damage due to floods, earthquakes, sewer backups or sinkholes. If those are major risks where you live, you can buy separate insurance to protect you.

Learn more: Do You Have to Have Homeowners Insurance?

How Much Dwelling Coverage Do I Need?

Dwelling coverage pays to repair or rebuild your home's structure if it's damaged or destroyed by risks such as:

• Fire or smoke
• Wind, hail or lightning
• Falling objects
• The weight of snow, sleet or ice
• Water from burst pipes or freezing (but not from floods)
• Theft or vandalism
• Explosions

Detached structures on your property, such as a gazebo or freestanding garage, are usually covered by dwelling insurance too.

Lenders typically require carrying enough home insurance to pay off your mortgage, but that may not be enough to rebuild your home. The cost of rebuilding doesn't include land, so it differs from your home value. To calculate how much dwelling coverage you need, take the average building cost per square foot in your location and multiply that by your home's square footage. You can get average rebuilding costs from your insurance agent or a local real estate agent.

Other factors that could affect your rebuilding costs include:

• The home's exterior wall construction (masonry, veneer or frame)
• The style of your home (midcentury modern or Victorian, for example)
• The home's roof style and materials (slate, tile, tar paper)
• Whether your home was custom built
• The number of rooms
• Unusual architectural elements such as fireplaces or arched windows

Learn more: How to Calculate the Replacement Cost of Your Home

How Much Personal Property Coverage Do I Need?

Personal property coverage pays to replace possessions that are stolen, lost or destroyed by a peril covered in your policy. Many home insurance policies also cover personal property outside the home, such as belongings stolen from your car.

Typically, personal property coverage is capped at 50% to 70% of your dwelling coverage amount. For example, if your dwelling coverage is $300,000, your personal property coverage might range from $150,000 to $210,000. To determine if that's enough coverage for you:

1. Take a home inventory. Go through your house and list the items in each room, such as "10 place settings" or "55-inch OLED TV set," estimating the cost of each. For more detail, take photos or videos of your belongings, record their serial numbers and scan receipts.
2. Decide if you need replacement cost coverage. Standard home insurance pays the actual cash value of your items, or what they're worth today. If you want a payout that will replace your possessions with equivalent new ones, you can buy replacement cost coverage for an extra cost.
3. Assess your valuables. Coverage for certain items, such as fine jewelry, computers and art, is usually capped at a few thousand dollars. If your items are worth more, you can typically buy an insurance rider to cover their full value.

Tip: Apps such as the Home Inventory App from the National Association of Insurance Commissioners (NAIC) can make conducting a home inventory easier.

How Much Liability Coverage Do I Need?

Homeowners liability insurance covers legal and medical costs if a visitor is injured on your property, or if a member of your family accidentally injures someone or damages their property outside your home. For example, homeowners liability insurance would help pay for:

• Medical treatment if a visitor falls and breaks an arm
• The cost of your legal defense and any damages awarded if the visitor sues you
• Lost wages if your visitor couldn't work due to their injury
• Replacing a neighbor's window that your child broke

Most standard homeowners insurance includes $100,000 in liability coverage. Since this may not be enough to safeguard your assets in case of a lawsuit, it's generally advised to buy a minimum of $300,000 to $500,000 in liability coverage. You can do this by purchasing excess liability coverage, which usually costs about $10 annually for every $100,000 in coverage. For additional protection, consider umbrella insurance (more on that below).

Learn more: What Does Homeowners Liability Insurance Cover?

How Much Additional Living Expenses Coverage Do I Need?

Also known as loss of use coverage, additional living expenses (ALE) insurance helps cover the extra costs of living elsewhere while your home is repaired or rebuilt. If your insurer deems your home unlivable during repairs, ALE coverage helps pay for:

• Rent or hotel costs
• Restaurant meals
• Pet boarding
• Moving expenses
• Furniture rental or storage
• One-time costs of moving, such as security deposits
• Commuting costs if your commute to work or school is longer than normal

ALE coverage typically has a dollar amount cap or time limit. For example, coverage may be capped at 20% of your dwelling coverage or 12 months of expenses. If you live in a region prone to natural disasters, where rebuilding may take longer, or in an area where renting is expensive, it may be worth paying extra to increase your time or coverage limit.

Learn more: What Does Homeowners Insurance Pay for During Home Repairs?

Extra Coverages to Consider

Standard homeowners insurance doesn't cover every risk, and standard policy limits may not be enough for you. If so, consider the following add-on coverage.

Enhanced Dwelling Coverage

The cost of rebuilding your home can be impacted by inflation and the cost of labor and materials. These additional coverages can help ensure you're protected.

• Inflation coverage raises your dwelling coverage limits annually to keep pace with inflation.
• Guaranteed replacement coverage pays to rebuild your home as it was, even if the cost exceeds your coverage limits.
• Extended replacement insurance increases your dwelling coverage by 20% or more to help cover rising rebuilding costs.
• Coverage for older homes can help protect homes over 50 years old that might require specialized skills or materials to rebuild, repair or bring up to code.

Umbrella Insurance

Excess liability extends coverage limits for risks covered by your homeowners policy. Umbrella insurance is similar, but applies to perils covered by both auto and home insurance, and may cover other risks too. Consider umbrella insurance if your assets, including your home, cars and savings accounts, exceed the coverage limits on your home or auto policy. If you're sued, umbrella insurance protects your assets by paying out when you reach the limits of your home or auto insurance.

Learn more: Do I Need Umbrella Insurance?

Flood Insurance

Flood insurance covers repairing or replacing damaged structures and belongings after a flood. Private insurers sell flood insurance dwelling coverage of up to $250,000 and personal property coverage of up to $100,000 through a program administered by the Federal Emergency Management Agency (FEMA). If you have a federally backed mortgage and live in a high-risk area, your lender may require flood insurance.

Earthquake Insurance

Earthquake insurance covers your dwelling, personal property and ALE, and generally pays for building code upgrades to your home that may be required after a quake. Although deductibles can be up to 25% of your coverage limits, the cost could be worth it compared to paying out of pocket to rebuild.

Water Backup Insurance

Water backup insurance pays to repair damage if water backs up into your home from a drain, sewer or sump pump failure. This coverage can be a good addition to your homeowners policy if you have a basement or an older home or live in an area with aging water systems.

Sewer Line Insurance

Your sewer line, which runs between your home and your city's sewer main, can burst or leak. Water backup insurance covers damage to your home from a sewer line, but if the sewer line itself is damaged, you're on the hook for repairs. Consider getting sewer line insurance to pay for repairs to the sewer line pipe itself.

Sinkhole Insurance

Are sinkholes common in your area? Purchasing a sinkhole insurance policy or sinkhole rider to your homeowners insurance can help protect your home and personal property if destroyed or damaged by a sinkhole.

Learn more: How to Buy Home Insurance

The Bottom Line

You may need more coverage than standard homeowners insurance offers, but purchasing extra insurance can add to your premium. To save on home insurance, you can compare quotes from different insurers, bundle home and auto insurance and raise your deductible.

In states where insurance companies can review your credit-based insurance score when setting premiums, maintaining good credit could also save you money. As with your regular credit score, paying bills on time and paying down debt can help improve your credit-based insurance score.