How much home insurance do I need?

You need enough home insurance coverage to rebuild your home completely from the ground up, cover any other structures on your property and cover all of your personal property.

Without the right amount of home insurance, you could find yourself out of pocket thousands of dollars and without the money to fix the damage to your home.

Your home should be covered at its replacement cost and have enough coverage for property, including high-value items. You should also ensure that you have enough personal liability coverage to protect your assets.

How do I determine how much home insurance coverage I need?

When determining how much home insurance you need, there are a few questions you can ask yourself:

• How much would it cost to completely rebuild the house from the ground up?
• Do you have any valuables in the home that need to be insured, too?
• Do you live in an area that’s prone to natural disasters, such as floods or earthquakes?

Once you know the answers to these questions, you can select which types and levels of coverage you need. A standard home insurance policy includes the following, with coverage limits for each:

• Dwelling insurance
• Liability insurance
• Property insurance
• Additional living expense or loss of use coverage
• Medical payments coverage

Here’s a closer look at what these home insurance coverage categories entail and how to determine the level you need.

How much dwelling coverage do I need?

You need enough dwelling coverage to rebuild your home. “This is the amount the insurance company would pay to rebuild the structure of your home in case of complete destruction,” said John Bodrozic, co-founder of home management tool Homezada.

Dwelling coverage ensures all of your home’s structural elements, plus anything attached to it, such as the foundation, frame, roof, plumbing, built-in fixtures and appliances, and even in-ground pools. It does not cover other items that may be on your property but aren’t attached to it. That includes sheds, detached garages, above-ground pools, and fencing.

“In terms of how much is needed, every carrier will run a replacement cost coverage estimator, which uses the latest data to determine the cost to rebuild that particular home,” said Stacey Giulianti, chief legal officer for Florida Peninsula Insurance Co.

This amount is not the same as your mortgage amount or most recent appraisal but the actual home rebuild cost, including construction, materials, and labor to rebuild your same home at today’s prices. This may be more than the market value or what you could sell the property for.

Standard home insurance policies cover the home at replacement cost, which is calculated based on the details of your home.

“[These values] will be determined by the insurance company, and are not generally subject to change,” Giulianti said. That is unless you’ve customized the home or it’s much higher quality than similarly situated dwellings, he noted.

If you’ve done major remodeling or upgrades, you may be underinsured within the dwelling portion of your policy, Bodrozic added. For example, if you invested $50,000 in a kitchen remodel, you should let your insurer know so the coverage amount can be increased.

You can also opt for an endorsement that extends this amount: extended or guaranteed replacement cost coverage. These endorsements protect you from inflation and other changes in construction costs.

How much liability coverage should I have?

“Liability coverage provides a defense and indemnity funds if another person gets injured by the negligence of the policyholder (not including auto negligence),” Giulianti says.

For instance, if someone tripped on one of your porch steps and broke their arm, liability insurance would cover the legal fees if they sued you.

Property damage is also covered under liability insurance, as well as injury or damage caused by pets, such as a dog bite (though some policies exclude dog bites). And it extends beyond your four walls – if you cause damage or injury away from home, liability insurance covers you as long as there is no vehicle involved.

Liability limits vary, although they are typically between $100,000 and $300,000 in coverage, Giulianti noted. If you want to up that coverage, you can consider adding an umbrella or excess liability policy to provide additional protection beyond the standard policy.

This coverage kicks in after you’ve exhausted the liability coverage from your underlying policy and usually offers a broader range of coverage. Typically, these are sold in increments of $1 million up to $5 million.

Personal property coverage recommendations

In addition to the structure itself, you’ll also want to ensure the contents inside your property are protected, too. This is one area where it’s easy to be under-insured, according to Bodrozic. To be sure your valuable belongings are protected, it’s important to have adequate personal property coverage.

“This is the amount that the insurance company would pay if all your personal property were destroyed,” he explained. That includes high-value items and collectibles such as jewelry, power tools, art, etc.

The cost to replace these items may be hard to estimate. Bodrozic recommends that homeowners take an inventory of these items and take photos and video to document their ownership. If you have particularly valuable property, like rare artwork or specialized equipment, buying extra insurance for these items is a good idea. “It is usually a very small increase, but you get peace of mind that your high-value items are covered,” he says.

Personal property coverage is usually set at 50% of the dwelling coverage amount, but can be increased.

Additional living expenses coverage

If your home is completely destroyed, you could be out of a home for months – maybe even years. Loss of use coverage, also known as additional living expenses (ALE) insurance, pays for your housing and living expenses (within reason) while you wait for your home to be rebuilt.

This coverage is also a percentage of the dwelling coverage limit. Typically, it’s around 20-30%. So, if your home is covered for $250,000, 20% ALE coverage would be $50,000.

Medical payments coverage

This homeowners insurance coverage pays for medical expenses incurred due to an injury on your property, regardless of whose fault it was. This differs from liability insurance, which only kicks in if you are at fault. Medical payments coverage only covers bodily injury and not property damage. It’s designed to cover small claims amounts of around $1,000 to $5,000.

Do I need flood or earthquake insurance and if so, how much?

Certain natural disasters aren’t covered by your traditional homeowners, such as earthquakes and floods. You can purchase separate policies for this specialized coverage.

According to FEMA, just one inch of water can cause $25,000 in damage. You can purchase coverage through the government-sponsored National Flood Insurance Program or a private insurer. NFIP plans cover up to $250,000 for the property and $100,000 for the contents, which may or may not be enough.

While not as common as flooding, earthquakes are another natural disaster you may want to buy added protection from. It’s a good idea if you live in an earthquake-prone state such as California.

Are there other types of home insurance coverage I might need?

Depending on your financial and living situation, there may be other specific situations you might want to insure against. Some additional riders and endorsements you can consider purchasing include:

Water backup coverage

Since most homeowners policies don’t cover this type of damage, you may want to purchase additional coverage against water damage due to sewer backups.

Business property coverage

If you run a home-based business, you may want to purchase separate insurance for your business-related property, such as office supplies or inventory.

Identity theft restoration coverage

Getting your identity stolen can cost quite a bit of time and money. This optional coverage pays you for lost wages, legal fees, mail fees, and more.

How to increase homeowners insurance coverage limits

As time passes, there may be times when your standard homeowners insurance coverage isn’t enough. Here are a few ways to build in some protection for life and economical changes.

Extended and guaranteed replacement cost

Extended replacement coverage will pay to rebuild your house even when the total cost exceeds the actual cash value. There is usually a maximum coverage amount, but it’s 25% to 50% above your dwelling coverage. There’s also guaranteed replacement coverage, which pays to rebuild your home according to the previous size and specifications, no matter the cost.

Inflation guard

This is an endorsement you can add to your homeowners insurance policy that gradually and continually increases your coverage limits by a certain percentage over a certain period of time. Generally, the rate of the limit increase is meant to match the rate of inflation – about 2%-5% annually.

Ordinance coverage

Also known as law coverage, building ordinance coverage is another endorsement that reimburses you for the cost of rebuilding or repairing your property if changes to ordinances or laws cause those costs to increase.

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