What is dwelling coverage and how much do you need?

Dwelling coverage is the main part of a homeowners insurance policy and pays to repair or rebuild your home after a covered loss, such as fire or vandalism. It covers the structure of your home, including things like the roof, windows, and siding and interior features like flooring and cabinets.    

It is critical that you purchase the correct amount of coverage for your specific property so you are not left financially responsible in the wake of a disaster. Your dwelling coverage should equal the current replacement cost of your home at today’s prices.

“Insurers pay claims up to the limits in your policy. However, if you don’t have enough coverage, you could face a significant insurance gap which would make you responsible for covering the difference if the claim payout is not enough,” says Mark Friedlander, director of corporate communications at the Insurance Information Institute.

Before you choose the dwelling coverage limit on your home insurance, find out how to estimate the replacement cost for your dwelling coverage so you can shop with a number in mind, and how to get the most accurate replacement cost calculation.

How much dwelling coverage do you need?

You should purchase coverage in a dollar amount equivalent to 100% of the cost of rebuilding your home from scratch at today’s prices. If your dwelling coverage falls below 80% of the home’s full replacement cost, your insurer can refuse to pay out your claim in full. 

“If you suffer a covered loss and your home is insured for less than 80% of its replacement cost value, your insurer may cover less than the full amount of your claim,” Friedlander says.

He also adds that “some home insurers may require higher percentages of coverage or they may have built-in policy features that automatically account for increased replacement costs due to inflation.”

Due to inflation and changing building costs, it’s essential to keep your dwelling coverage at or above your home’s replacement cost; most insurers adjust limits annually, and an inflation guard endorsement can provide added protection against mid-term inflation adjustments. Additionally, remember to check your lender’s requirements, as most require replacement cost coverage to protect your home loan, so verify that your policy meets these terms.

How to calculate how much dwelling coverage you should buy

Patrick O’Keefe, owner of Cascade Insurance Center, recommends consulting a licensed agent for help calculating the right amount of coverage for your home. “These calculators factor in the price of goods and labor in your ZIP Code, along with features of the house which include square footage, quality (and) unique features,” he says. 

To calculate how much dwelling coverage you need, determine the replacement cost of your home. This is how much it would cost to repair or replace your home at today’s prices, so you want to be sure that you are using the most current construction costs for your local area. A real estate agent or home construction company can help you get a ballpark figure of the average construction cost per square foot in your area. 

Once you have the cost per square foot, you can estimate how much dwelling coverage you need. All you need to do is multiply the square footage of your home by the square-foot price of local rebuild costs. 

Our dwelling coverage calculator can help you estimate how much dwelling coverage you need. 

Keep in mind that this formula is just a loose estimate. A property appraisal remains one of the best ways to receive a proper replacement cost calculation since it takes into account all of the little details that make up your home’s construction.

Insurance companies also have tools to help you calculate your home’s replacement cost.

What is replacement cost coverage?

Your home’s replacement cost coverage sets your policy limits based on the actual cost to rebuild your home today, covering only the structure and attached elements, like a deck. This is different from market value, which fluctuates due to factors like land value, local market conditions, and neighborhood amenities, such as school districts or nearby parks.

These market factors don’t impact the cost to rebuild your home, so they aren’t relevant to replacement cost calculations. To ensure you have the right amount of coverage, consult with your insurance agent to avoid over- or under-insuring your property.

What is extended dwelling coverage?

Extended dwelling coverage, commonly called extended replacement cost coverage, provides an extension of your dwelling coverage limits to allow for changes in construction costs over the policy term. It is not included in all policies.

“Extended dwelling coverage is designed to give wiggle room from the replacement cost coverage listed on your policy,” O’Keefe says.

For example, during the pandemic supply chain issues caused the cost of construction materials to soar. In such situations, extended dwelling coverage can provide the extra insurance you need to repair or rebuild your home. It usually allows for an additional 25% or 50% on top of the coverage limit.

So, if you have dwelling coverage of $100,000 and 125% extended replacement cost coverage, your actual available limit is $125,000.

You may also be able to add a guaranteed replacement cost endorsement to your policy, which ensures that your home will be rebuilt regardless of how far past the limit the cost turns out to be.

What is covered under dwelling insurance?

Dwelling insurance, also known as Coverage A in a homeowners policy, protects the physical structure of your home, including walls, roof, floors, and built-in appliances, against various covered perils such as fire, windstorms, and vandalism. This coverage extends to any attached structures like a garage, deck, or porch. In the event of a covered loss, dwelling insurance will help pay to repair or rebuild these parts of your home, ensuring you have the financial support needed to restore your property.

What isn’t covered under dwelling insurance?

Dwelling coverage only protects your home’s structure, not personal property or unattached structures, which are covered elsewhere in your policy. Personal belongings, liability protection, and additional living expenses if you need temporary housing during repairs are also covered under different sections of your policy. Knowing which perils and structures are included in dwelling coverage can help you secure adequate protection for your property.

Additionally, certain perils, like floods and earthquakes, are excluded from standard homeowners insurance, so if you’re in a high-risk area, consider purchasing separate flood or earthquake insurance, or add an earthquake endorsement if available.

Other common exclusions are:

• Water and sewer backup
• War
• Nuclear disaster
• Wear and tear or lack of maintenance
• Intentional damage
• Pests infestations
• Mold, with some limited exceptions

Your insurance company representative can provide more details about what is or isn’t covered by your policy.

Homeowners insurance costs by dwelling coverage and state

The cost of your home insurance largely depends on how much dwelling coverage you buy. Dwelling coverage is responsible for the bulk of your home insurance costs and can significantly impact how much you pay.

This is a look at how dwelling coverage levels impact the cost of home insurance in different states. 

Calculate homeowners insurance costs by dwelling coverage and ZIP code

Where you live impacts how much you pay for dwelling coverage. The reasons for this include differences in risk — some areas are more prone to severe weather than others — and differences in construction and labor costs.

Take a look at how dwelling coverage costs vary by ZIP code.

Why is the cost of my dwelling coverage so high?

The cost of dwelling coverage may seem high, but remember that this insurance coverage is designed to completely rebuild your home from the ground up. It may be higher or lower than the market value

“Dwelling coverage is the replacement cost value of your home. It is an essential component of your policy. It is the largest component of an insurance policy in terms of how your premium is determined. It’s important for homeowners to make sure they have adequate dwelling coverage to ensure they are protected from all perils included in their policy. It’s also important to note that replacement cost value is not the same as real estate market value of your home,” Friedlander says.

The market value is the value of your home based on the real estate market, which includes the cost of your land. It takes into consideration area appeal, as well as values for comparable properties in the neighborhood.  

With insurance costs on the rise, it helps to get a quote before purchasing a new home, says O’Keefe. 

“We strongly recommend anyone looking at making an offer on a home to look into insurance early in the process. It can be as simple as giving their agent an address to look into,” he explains. “Of course, a mortgage company will need [to] confirm coverage is in place before giving a loan, but [it is] better to know earlier than later if there will be any issues getting insurance.”

Experts generally advise insuring your home at its full replacement value, which may make dwelling insurance cost more than expected. However, the reassurance of knowing your home is fully protected is well worth the investment.

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