Homeowners insurance protects what may be the biggest investment of your life: Your residence. Having sufficient coverage is crucial in case of a disaster like a fire.
But how much homeowners insurance do you need? The key is to walk through each standard coverage type in a policy, adjust amounts as needed and then consider extra coverage to plug big holes.
What Home Coverage Types Do You Need?
A standard homeowners insurance policy comes with several necessary coverage types to address problems like damage to your house, theft or damage to your personal property, and accidental injuries to others.
How to Determine How Much Homeowners Insurance You Need
Deciding how much home insurance you need may require help from your home insurance company or agent, figuring out your assets and estimating the value of your personal property.
Choosing the Right Dwelling Coverage
Dwelling coverage pays to repair or rebuild your home if it’s damaged by a problem covered in your policy. Home insurance companies can usually provide an estimate of the cost to rebuild your house.
Most standard homeowners insurance policies cover the house structure for any problem except damage that is specifically excluded. These exclusions are listed in the policy and generally include floods, earthquakes and nuclear hazards.
Dwelling coverage should be based on the cost in your area to rebuild the house, factoring in local construction and materials costs. Your home insurance company can provide an estimate.
Dwelling coverage limits should be updated regularly, every year if needed, to reflect changing local labor and materials costs.
Dwelling insurance also influences coverage amounts for other structures and additional living expenses, but you can buy additional coverage if needed::
Coverage for other structures is usually 10% of your dwelling coverage.
Additional living expenses coverage is typically 20% of your dwelling coverage.
Buying better dwelling coverage
Having sufficient dwelling coverage to rebuild your house is the foundation of a good homeowners insurance policy. But there are times when even the “right” amount of coverage can fall short.
For example, after widespread disasters, such as a tornado, the cost of materials and labor can increase due to demand. That’s where coverage that allows for some wiggle room is useful. Two examples are extended replacement cost and guaranteed replacement cost coverage.
Extended replacement cost: Home insurance companies may offer extended replacement cost. This feature can provide anywhere from 10% to 50%—or more—of extra coverage to absorb a cost spike. PURE, for example, provides an additional 100% for extended replacement coverage in its policies for high-value homes.
Insurers offering “extended replacement cost” include:
Chubb
The Cincinnati
Country Financial
Erie Insurance
Grange Insurance
Lemonade
PURE
QBE Insurance
Guaranteed replacement cost: Guaranteed replacement cost coverage is even better because it pays to rebuild your house no matter how much it costs.
Insurers offering “guaranteed replacement cost” (and usually also extended replacement cost) include:
Acuity
AIG
Central Mutual
The Cincinnati
Erie Insurance
Farmers
The Hanover
Nationwide
Palisades Property & Casualty
Availability of extended and guaranteed replacement cost can vary by company, state, policy type and even by house type. It may not be available for older homes.
Choosing the Right Personal Property Coverage
The amount of personal property coverage you need depends on your possessions. This coverage includes items such as your furniture, decorations, clothes, electronics, toys and appliances.
Home insurance companies often set personal property coverage at 50% to 70% of your dwelling coverage amount. You can adjust your contents coverage upward to get better insurance protection.
To determine if your personal property coverage is sufficient, it’s a good idea to calculate the value of your belongings. A good way to do that is with a home inventory. A home inventory can include information such as:
Description of the item, including the make and model
Estimated value
When you bought it
Serial number
Receipts, if available
For general categories, such as clothing, you can provide the number of items, such as five dresses, three pairs of jeans and 10 dress pants. If the clothing is valuable, such as an expensive dress or suit, you should list them separately.
Replacement value coverage for better protection
You may choose between actual cash value or replacement cost coverage for your personal property. Actual cash value vs. replacement cost coverage influences how much you pay for coverage and how much you will get paid if you file a personal property claim in the future.
While some policies offer “actual cash value” coverage, you generally want to choose “replacement cost” coverage because it offers a higher claim payout. It reimburses you for the cost of buying new, similar items, not the depreciated value of what was destroyed.
“Open peril” coverage for belongings
A standard HO-3 home insurance policy covers damage to your belongings from 16 “perils,” which are listed in the policy. These perils include common problems such as fire, lightning, explosions, theft and vandalism. But limiting coverage to 16 perils leaves you open to a potential gap in coverage.
You can instead buy more comprehensive coverage by choosing an “open peril” or “all peril” coverage for your contents. This offers the highest level of insurance and covers any problem that’s not specifically listed as an exclusion in the policy. The standard policy name for this is an HO-5.