The amount of homeowners insurance you need depends largely on your exposure to and tolerance for risk. When we say “exposure to risk,” we’re mainly talking about how much you have to lose and your chances of losing it. “Tolerance for risk” describes how much you can afford in premium as well as the amount of coverage you need to feel secure.
This guide examines each coverage part in a typical homeowners insurance policy. These are coverage parts are:
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Dwelling.
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Other structures.
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Personal property.
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Loss of use.
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Medical expenses
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Liability protection.
Having adequate limits for each coverage part is essential to your financial security and peace of mind – and that starts with what it would cost to replace your home after a total loss.
How much dwelling coverage do I need?
Coverage A, also called dwelling coverage, is the portion of your policy that pays for damage to the structure of your primary residence. Generally, insurance companies want you to insure your dwelling for its total replacement cost – that is, what it costs to rebuild your home from the ground up after a total loss using materials of a similar kind and quality.
Anything less than 100% replacement cost coverage means you aren’t fully insured to rebuild your home if necessary. Worse? You may run afoul of your policy’s coinsurance clause. This is a provision that requires you to carry a certain percentage of your home’s replacement value, usually between 80% and 100%. Failing to do so may mean your insurer covers less of your loss in a claim.
You can work with your insurance agent to estimate your home’s replacement cost. The number is based on its square footage, the quality of the construction materials, local construction costs, and other factors, like:
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Exterior wall construction (e.g., frame, veneer, or masonry)
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Architectural style.
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Number of rooms.
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Number of bathrooms.
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Roof type.
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Special features, like fireplaces or arched windows.
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Foundation condition.
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Improvements you’ve made.
The national average cost to build a new home is approximately $158 per square foot, but that varies widely in a region or state. For example, the average cost of building a home in Florida is $142 per square foot. In Hawaii, the average jumps to $205 per square foot.
Actual cash value vs. replacement cost coverage
Some insurers do offer dwelling coverage for your home’s actual cash value (ACV). These policies might be less expensive, but there’s a big difference in the amount of protection you get. ACV policies only cover what your property is worth at the time of the loss, meaning it subtracts for depreciation, deterioration, or obsolescence. The lower amount may not be enough to rebuild after a major loss.
Replacement cost policies pay the cost to rebuild your home at the current prices up to the policy’s limit and minus your deductible. It usually costs more than ACV coverage, but it also helps you recover more quickly and thoroughly.
Named perils vs. open perils coverage
Another issue to pay attention to in deciding how much home insurance you need is the perils you’re insured against. Some homeowners insurance is written as named peril coverage, so it only protects against damage caused by the events listed in the policy. The opposite is open perils coverage, which insures you for all events except those excluded from coverage in the policy language.
Endorsements to guard against rising costs
Many homeowners may keep the same homeowners insurance policy in place for years without giving it another thought. However, after a total loss, you may find that the cost to rebuild your home has gone up because of inflation. Or you may learn that you have to upgrade systems because building codes have changed.
You can protect yourself from these situations with several different kinds of endorsements. We’ve listed a few examples here.
Inflation guard
Inflation guard is an endorsement that automatically increases your property value at renewal to account for inflation. Typically, the increase is about 2% to your Coverage A amount, but bigger increases may be available.
Extended replacement cost
Extended replacement cost is a popular endorsement for homeowners insurance that protects you against higher labor and material costs. Getting this endorsement increases your dwelling coverage by a specific percentage. The amount varies by insurer but can be as much as 50%.
Guaranteed replacement cost
Even if your rebuilding expenses exceed your Coverage A limit, a guaranteed replacement cost endorsement ensures your home is returned to its pre-loss condition. The endorsement covers your full replacement cost.
Ordinance or law coverage
Ordinance or law coverage comes in handy if you ever have to upgrade your home to meet new building codes after a loss.
For example, suppose you rebuild your $300,000 home after a covered loss, but you need an extra $10,000 to update its electrical panel to comply with a new building code. Having ordinance or law coverage helps cover such an expense.
Some home insurance policies have some ordinance and law coverage included, usually for a limit of 10% of your dwelling coverage. So if your home is insured for $300,000, you may have up to $30,000 in ordinance or law coverage. People with older homes may want to increase that to 25% or even 50% to better protect your finances in a loss.
How much coverage do I need for my personal belongings?
Coverage C, or personal property insurance, covers your belongings that you might pick up and put on a moving truck, such as furniture, electronics, decor, clothing, etc.
A general rule of thumb is that Coverage C should be 50% of your dwelling coverage. That means a home insured for $300,000 should have at least $150,000 in personal property coverage. However, this depends on what your belongings are worth. The more valuable your stuff is, the more personal property coverage you need.
What’s my stuff worth? Create a home inventory to find out
The best way to know what your stuff is worth is to inventory what you own. As a bonus, a home inventory is handy when you make a claim to replace your lost belongings.
Go room by room and document what’s there and what it costs. (You might find it helpful to take pictures or video of the contents of each room.) List the major items and include receipts for big purchases, like furniture or electronics. Don’t have the receipt? Try finding the make and model, and note what year you made the purchase.
Once you have the total value of your personal belongings, you’ll have a better idea about how much personal property coverage you need.
How much personal liability insurance do I need?
Personal liability coverage, which may be called Coverage E or L in your policy, is intended to protect you if you’re sued over someone’s bodily injuries or property damage. Suppose your tree falls on a neighbor's roof or your kid hits a home run through someone’s window; this cover typically helps pay for the expenses that follow. Most policies also provide legal assistance if you’re sued.
Insurance companies usually recommend that homeowners should have at least $300,000 in personal liability coverage, which may be enough to cover common claims. If you have a swimming pool, have a high net worth, or could be a target for frivolous lawsuits, increasing your personal liability coverage may make sense.
How much coverage do I need for medical payments?
Not every injury that happens on your property results in a lawsuit. There are “friendly” claims where someone you invite over may trip and fall or otherwise get hurt. Medical payments coverage, called Coverage F or M in your policy, helps pay for visitors’ immediate medical expenses.
You might think, “Isn’t that a job for my guest’s health insurance?” Yes, but if their health insurance company knows the incident happened on your property and that you have insurance coverage for guest’s the medical expenses, it will look to your policy and insurer to pay some of the bill.
Your homeowners insurance policy usually includes at least $1,000 in medical payment coverage for this reason, but you can purchase additional coverage.
How much homeowners insurance do I need for other structures?
Coverage B, also known as other structures insurance, pays for damage to structures on your property that aren’t attached to your dwelling. Examples of other structures include fences, detached garages, sheds, gazebos, and carports. You usually want to insure other structures at a minimum of 10% of your dwelling coverage.
But if you have elaborate other structures on your property, like a guest studio with a kitchen and bathroom, it might make sense to increase this coverage.
How much loss of use insurance do I need?
Coverage D, or loss of use coverage, steps in when a claim forces you to live away from your home while repairs are underway. It can also help cover loss of rent if you lease out your home.
Loss of use helps with additional living expenses (i.e., costs that go beyond your normal everyday expenses). For example, if you find yourself commuting a longer distance, eating takeout, or having to pay hotel bills, you can save your receipts and make a claim on your Coverage D.
Insurers often suggest your Coverage D limits should be about 20% of your home’s dwelling coverage. Again, for a $300,000 home, that would be $60,000 in protection.
Other home insurance coverage to consider
Home insurance can protect you from many of the perils that might cause financial loss; however, some homeowners have concerns that a standard policy doesn’t typically address. The solution is usually getting additional policies or endorsements to cover these exposures.
Flood insurance
Every homeowner needs to know that flood damage is not covered under a standard homeowner's insurance policy. What’s perhaps more important to understand is that just about every home has some exposure to flood risk. This is why more homeowners are choosing to add flood insurance.
Most home flood insurance is managed through the National Flood Insurance Program (NFIP), which is run by the Federal Emergency Management Agency. Some insurers offer private flood insurance.
Excess flood insurance
NFIP coverage limits for flooding damage stop at $250,000 for residential property damage and $100,000 for personal property damage. This might not be enough coverage for some homeowners, especially for those with high-value properties.
Excess flood insurance adds a layer of protection to your existing NFIP protection.
Sewer and water backup coverage
Sewer and drain backups are not generally covered under typical home insurance or even flood insurance. To protect against a nasty and potentially expensive problem, consider getting a water backup and sump overflow endorsement.
Earthquake insurance
Ground movement, like earthquakes, sinkholes, and landslides, is another peril that’s typically excluded from home insurance policies. However, you can often add endorsements or standalone earthquake and sinkhole insurance.
Out-of-pocket expenses
Part of deciding how much home insurance you need is determining what you can afford. Getting home insurance is a key component of financial security, so most people hope to find policies that fit both their budget without sacrificing coverage.
One way to do that is with deductibles. A deductible is the portion of a claim that you’re responsible for covering. Most insurers offer a variety of options for how much your deductibles are.
Choosing a higher deductible creates a lower premium, and vice versa. However, you don’t want to make a mistake by increasing deductibles too much simply to save on insurance premiums. Instead, pick a deductible you can reasonably afford even if you were to suffer a total loss on your home.
