Every homeowner has unique coverage needs based on their property, risk tolerance, and the likelihood of a claim. But in general, the amount of homeowners insurance you need depends on the cost of rebuilding your home and replacing your personal belongings after a total loss.
Though there is no one-size-fits-all answer, there are several steps you can take to determine the right amount of homeowners insurance for your situation, and what optional policies you should consider depending on your situation.
5 steps to determine your coverage needs
Your house is likely the biggest investment you’ll ever make, so it’s important to have enough homeowners insurance coverage in case something goes wrong. If you’re underinsured, you’ll be on the hook for covering a larger portion of a loss, which could have major financial consequences.
Here are five steps you can use to determine how much home insurance coverage is necessary for your property.
#1 Determine the replacement cost of your home
The replacement cost value of your home is how much it would cost to rebuild your home if it were completely destroyed. This value is based on a range of factors, including the composition and square footage of your home as well as the cost of labor and materials in your area.
You can use the replacement cost value of your home to determine your policy’s dwelling coverage limit. You should have enough dwelling coverage to cover 100% of your home’s replacement cost.
To calculate your home’s replacement cost, take the average building cost per square foot in your area and multiply that figure by your home’s square footage. That will give you a rough estimate of the replacement cost. If you want a more specific number, you can hire a home appraiser to assess your home in person.
Note: Your home’s replacement cost value is not the same as its market value, and it may even exceed what you paid for your home.
#2 Evaluate your personal property
Your personal property insurance coverage limit should be based on the total value of the personal belongings in your home. This includes items like furniture, small appliances, electronics, decor, and clothing.
Creating a home inventory is a great way to estimate the value of your personal belongings. You can create a home inventory by going room to room to take photos or video of your belongings, or make a written record of your belongings.
Learn more: How to take a home inventory
Keep in mind that most standard homeowners insurance policies provide limited coverage for valuable items like fine art, collectibles, jewelry, furs, and firearms. If you keep these items in your home, consider adding a scheduled personal property insurance endorsement to extend your coverage limits for these possessions.
#3 Consider liability protection needs
Standard home insurance policies provide personal liability insurance. This part of your policy can provide financial protection for the following:
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Injuries to a third party. If someone is injured in your home and you’re at fault, this liability insurance can help cover their related medical expenses and lost wages.
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Property damage. If you or a covered household member is responsible for damage to another person’s property, such as a broken window, this part of your policy can cover repairs or replacements.
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Legal expenses. If you’re sued after a covered incident, your policy can help cover your legal fees, including settlements and judgments.
You should carry enough liability insurance to protect your assets, including real estate, savings, investments, vehicles, boats, etc.
#4 Review other commonly included coverages
Don’t overlook other types of coverage (and limits) included in a standard policy:
Other structures coverage
This part of your policy pays to repair or rebuild structures on your property, such as sheds and detached garages, that aren’t attached to your home. Your other structure limit should be high enough to cover the cost to rebuild or replace any other structures on your property.
Loss of use coverage
Also called additional living expenses (ALE), loss of use coverage pays for temporary living expenses if your home becomes uninhabitable following a covered loss, such as a fire. It can help you pay for essentials like lodging, meals, or laundry services.
Under most home insurance policies, the coverage limit for loss of use is about 20% of the dwelling insurance coverage limit. So, if your dwelling coverage limit is $350,000, you would have $70,000 in loss of use coverage.
Medical payments
Medical payments coverage helps pay for another person’s medical expenses if they get injured on your property, regardless of whether you were responsible for the incident. Most home insurance policies provide $1,000 to $5,000 in coverage.
#5 Consider any optional or required additional coverages
Standard homeowners insurance policies provide coverage for many of the losses you might face, but it doesn’t cover everything. Depending on your property risks and desired level of protection, you may benefit from adding one or more of the following coverages.
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Flood insurance. Standard policies never cover flood damage. If you live in a flood-prone area, consider adding a flood insurance endorsement to your policy or purchasing a separate flood insurance policy. If you have a mortgage or received FEMA aid in the past, you may be required to carry flood insurance.
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Earthquake insurance. Standard home insurance policies exclude coverage for seismic activity. If you live somewhere that’s prone to earthquakes, you might consider purchasing a separate earthquake insurance policy.
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Sinkholes. Like earthquakes and flooding, sinkholes are excluded from most policies. If your home is at risk for sinkhole damage, consider adding a sinkhole endorsement or separate policy.
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Water backup coverage. Your home insurance policy covers some instances of water damage, but it generally excludes damage from events like backed-up sewers or failed sump pumps. A water backup endorsement is an easy and relatively inexpensive way to expand your coverage.
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Ordinance or law. If you live in an older home or in an area that consistently updates building codes, consider adding ordinance or law coverage. Ordinance or law coverage helps pay for additional costs you may incur to bring your home up to code after a covered loss.
Several factors can affect your home insurance needs. Speaking with a licensed agent can help you determine what types of coverage may be best suited for your unique property risks, budget, and desired level of protection.