How Much Homeowners Insurance Do You Need?

How to Calculate How Much Homeowners Insurance You Need

Most standard homeowners insurance policies offer four basic types of coverage:

• Liability protection if someone is injured on your property
• Dwelling coverage to repair or rebuild your home's structure
• Personal property coverage for belongings
• Additional living expenses coverage if you have to live elsewhere while your home is repaired

Homeowners insurance does not usually cover damage from earthquakes, floods, sewer backups or sinkholes. Depending on where you live, you may want to buy separate insurance to protect against these risks. You might also need extra coverage if the value of your home, assets or belongings exceeds the dollar limits of standard home insurance.

How Much Dwelling Coverage Do You Need?

Dwelling coverage pays to repair or replace the physical structure of your home if it's destroyed or damaged by any of the following:

• Fire or smoke
• Wind, hail or lightning
• Water from a freeze or pipes (but not from a flood)
• Theft or vandalism

Additional structures on your property, such as a gazebo or detached garage, are typically covered as well.

Lenders usually require maintaining at least enough home insurance to pay off the mortgage. Would that be enough to rebuild your home if it were destroyed? (Rebuilding costs don't include land, so this figure differs from your home's value.) To calculate how much dwelling coverage you need, ask local real estate agents or insurance agents for the average building cost per square foot in your area, and multiply that figure by your home's square footage.

Other factors affecting the dwelling coverage you need include:

• Exterior wall construction (masonry, veneer or frame)
• Roof materials and style (slate, tile, tar paper)
• Home style (midcentury modern or Victorian, for example)
• Whether the home was custom built
• Number of rooms
• Unusual features such as arched windows or fireplaces
• Any detached structures you have

How Much Personal Property Coverage Do You Need?

Personal property coverage pays to replace belongings lost, stolen or damaged by a covered incident. Some insurance policies also cover belongings outside of your home, such as items in a car or storage unit.

Personal property coverage is typically 50% to 70% of your dwelling coverage amount, but you might want more. To calculate how much personal property coverage you need:

1. Take a home inventory. Tour your house room by room, noting items in each room, such as "10 sets of silverware" or "four pairs of jeans," and estimating costs. Recording or photographing belongings can help demonstrate their value, as can keeping receipts or recording serial numbers.
2. Decide if the actual cash value coverage is enough. Standard home insurance pays the actual cash value of personal property (what it's worth today). Actual cash value might not be enough to replace old belongings with equivalent new ones. For that, you'll need replacement value coverage.
3. Add extra coverage for valuables. Items such as artwork, jewelry and computers are typically capped at a few thousand dollars of coverage. However, you can generally buy a rider to cover them.

How Much Liability Coverage Do You Need?

If someone is injured on your property, or one of your family members accidentally hurts someone or damages their property outside your home, liability insurance covers legal and medical expenses related to the incident.

Liability insurance includes personal liability and medical expenses coverage.

• Personal liability coverage pays legal costs if you're sued for damages from a covered incident, and usually appoints an attorney for you.
• Medical expenses coverage helps pay the injured person's medical expenses, even if they have health insurance.

You need enough liability insurance to protect your assets. Standard homeowners insurance generally includes $100,000 in liability insurance, but you can buy excess liability coverage for additional protection. In general, expect to pay about $10 annually for every $100,000 in coverage.

How Much Additional Living Expenses Coverage Do You Need?

If you must move out of your home while it's repaired or rebuilt, additional living expenses (ALE) insurance covers extra costs related to living away from home, such as:

• Rent for a home or apartment
• Hotel costs
• Restaurant meals
• Boarding pets
• Moving expenses
• Cost of renting or storing furniture
• One-time moving costs (security deposits, utility hookups)
• Commuting costs of a longer-than-normal commute

To qualify for ALE coverage, the insurer must decide that your home is uninhabitable. There are typically dollar amount or time limits on ALE coverage, such as 20% of total dwelling coverage or 12 months. In areas prone to natural disasters, where rebuilding may take longer or cost more than that, ask your insurance carrier about increasing your time or coverage limit.

Extra Coverages to Consider

Standard homeowners insurance doesn't cover all risks, and the limits of your policy may not be enough for you. If so, consider the following coverage.

Umbrella Insurance

Excess liability extends coverage limits for risks covered by your homeowners policy. Umbrella insurance is similar, but applies to risks covered by both auto and home insurance, and may expand coverage to additional risks. Umbrella insurance kicks in when the limits of your auto or homeowners policy are reached, protecting your assets. Consider buying umbrella coverage if the value of your assets surpasses the limits on your home or auto policy.

Enhanced Dwelling Coverage

Inflation and labor and materials costs can affect the cost of rebuilding. Some additional coverages can help ensure you're protected.

• Inflation coverage raises your coverage limits every year in line with inflation.
• Guaranteed replacement coverage covers the cost of rebuilding your home as it was, even if that costs more than your coverage limits.
• Extended replacement insurance covers higher rebuilding costs by increasing your dwelling coverage by 20% or more.
• Coverage for older homes may be necessary for homes over 50 years old that might require specialized skills or materials to rebuild, repair or bring up to code.

Flood Insurance

Flood insurance pays to replace or repair damaged structures and their contents after a flood. Private insurers sell flood insurance through a program administered by FEMA. You can buy coverage of up to $250,000 for your dwelling and up to $100,000 for personal property. In areas deemed high risk, you may be required to get flood insurance if your mortgage is federally backed.

Earthquake Insurance

In addition to dwelling, personal property and ALE coverage, earthquake insurance typically pays for required building code upgrades to your home after a quake. Many insurance companies sell stand-alone earthquake insurance you can add to your homeowners coverage. Earthquake policies have deductibles as high as 25% of your coverage limits, but in areas where earthquakes occur, the cost could be worth it.

Water Backup Insurance

Water backup insurance pays for damage from water backing up into your home from a sewer, drain or sump pump failure. You may need it if your home is older, if you have a basement or if you live in an area with aging water systems. This type of damage isn't covered by homeowners insurance, but can be purchased as an endorsement to your home insurance policy.

Sinkhole Insurance

Are sinkholes common in your area? If so, consider purchasing a separate sinkhole insurance policy, or adding a sinkhole rider to your homeowners insurance. Sinkhole insurance protects your home and personal property if destroyed or damaged by a sinkhole.

Sewer Line Insurance

The sewer line between your home and your city's sewer main could leak or burst and damage your home. If it does, you're on the hook for repairs, since this isn't covered by standard home insurance. Sewer line insurance pays to fix the pipe itself; it may be available from your home insurance company or another provider.

The Bottom Line

Many homeowners need more coverage than standard homeowners insurance provides, but purchasing extra insurance can add to your premium. Save on home insurance by shopping around, bundling home and auto insurance and increasing your deductible. In states where insurance carriers can check your credit-based insurance score when setting premiums, maintaining good credit could also save you money. As with your regular credit score, maintaining low account balances and paying bills on time can help keep your credit-based insurance score in shape.