Purchasing homeowners insurance is an important way to protect what you love. Your home is one of your biggest assets. As you're looking to buy homeowners insurance and comparing policies to find the best, most affordable coverage, it's important to understand how much coverage you need.
It can sometimes be a challenge to know how much insurance you need. You don't want to be overpaying for insurance and losing money each month, but you also don't want to be underinsured as payments to cover damage and losses can add up fast.
But, don't worry. This guide breaks down how much insurance is right to protect you and your home, and how to find the best coverage.
The basics of homeowners insurance
Homeowners insurance is a basic way to protect your home, which is often one of your biggest assets. It is coverage from any financial losses, property theft, or damage to your home. It also protects you from lawsuits and other liability claims in the event of injury or accidents that take place inside your home.
Homeowners insurance is not required by the state. If you have a mortgage loan, your lender may require you to have homeowners insurance until you pay off the loan. However, homeowners insurance is a good idea for anyone, even if you've paid off your mortgage and own your home completely.
Similar to car insurance, you pay for the deductible, filing fee, and any expenses once your policy's limit has been exceeded. Your home insurance company will pay the rest. Typical homeowner's policies include three types of coverage, plus some coverage you can add. These three parts of homeowners insurance dictate how much coverage you need, so it's good to be familiar with them.
Structural: Structural insurance covers the actual structure of your home—the building itself, any additions you've made, garage, shed, etc. The structural aspect of home insurance will provide financial compensation for damage to the building and cover expenses to rebuild or repair damage.
Personal property: This aspect of homeowners insurance protects your possessions in the event of theft or property damage. For example, personal property coverage can replace items that are stolen or damaged or replace the items entirely. Possessions can include clothing, electronics, jewelry, silverware, and even furniture.
Personal liability: The last part of homeowners insurance is personal liability. If one of your guests or visitors is injured in your home, by your pet, or by a family member inside your home, this protects you against a lawsuit and can help you pay any medical bills or legal bills.
How much do you need?
In the event of a disaster to your home or your possessions, homeowners insurance protects you. But how much do you need? Let's break down how much homeowners insurance you need by the three main types of coverage.
1. Structural insurance
Whether you have a standard homeowners policy plan or added coverage for hurricanes or flooding, your insurance policy is enough to completely cover your asset. In other words, your insurance limit needs to be able to cover the cost of rebuilding your home.
It's important to note here that the cost to rebuild may not be equal to what you paid for your home. As the market changes, so does the current market price of your home, so let's review some factors that affect the cost to rebuild your home.
Construction: Depending on the construction costs in your local area, the cost of rebuilding your home can fluctuate and may be higher or lower than the original cost of building your home. Call your local real estate agent, insurance provider, or building association and ask what the construction costs are.
Size of your home: To figure out how much it will cost to rebuild the exact square footage of your home, multiply your home's square footage by your local per-square-foot construction price.
Other details: When calculating how much it may cost to rebuild your home in the case of severe damage, it's important to take these smaller details into account.
The style of house you own affects the cost of rebuilding. For example, rebuilding a colonial home or ranch-style home may cost more than building a simple two-story home. Whether you use brick, stone, veneer, and other materials used also affects the cost. How many bedrooms and bathrooms are in your house, structural features like a garage or porch, and any add-ons you've made also influence the cost to rebuild.
2. Personal property insurance
The second aspect of homeowners insurance to consider when calculating the amount of coverage you need is personal property. Most insurance policies will automatically add 50-70% of the coverage from the structure of your home to your personal belonging coverage, but you may want more than this. Here are some guidelines to help you calculate how much coverage you need for your personal property.
Keep a detailed account of your possessions. The best way to learn how much coverage you need for personal property is to keep a detailed account of the items you want to be covered. For example, if you want your electronic devices, artwork, jewelry, furniture, and clothing to be covered in the event of theft or damage, make a list of how much each item is worth.
By knowing how many possessions you have and what they're collectively worth, you can figure out how much coverage you'll need for them!
Decide if you want replacement costs or cash value costs: There are two ways to insure the items you own. You can insure them for replacement costs, which means insurance would entirely replace the items no matter how the price has changed. Or you can insure them for cash value costs, which means insurance would give you the amount your items are currently worth. If you have many expensive items, it is typically best to go with replacement costs.
Check for limits: Some homeowners insurance policies have limits for how much you can insure an item for. For instance, coverage for the jewelry you own may be less than $2000, or you may have a limit on how much coverage you can get on silverware or computers. Ask your provider if there are limits on expensive items. If there are limits, you can always insure items individually or collectively.
3. Personal liability insurance
The last aspect of homeowners insurance that affects how much you need is personal liability. This part covers any liability claims against you in the event that a guest or visitor gets injured on your property or in your home.
The same rule can be applied here. You need enough liability to cover your assets. This means the amount of liability insurance you have should meet or exceed the cost of your home. There is typically a minimum of $100,000 of liability coverage. If you do need to exceed this amount, you can add more.
4. Other factors
When deciding how much coverage you need to protect your home, it's also a good idea to note some other factors that may influence how much insurance you need.
Location: Location is a big factor that determines both the cost of home insurance and how much you need. The top three most expensive places for homeowners insurance are California, Florida, and Texas. If you live in a state like Florida that is known for natural disasters, you'll likely pay more for homeowners insurance and add on coverage for hurricanes, flooding, and earthquakes.
You may also want to purchase additional coverage if you live in a neighborhood with a high crime rate, or in an area close to many other homes, you may want to buy extra home insurance to protect from theft and property damage.
The age of your home: If your house is older, you may want to consider extra insurance to cover potential damage, or even to cover future plumbing and electrical work. While historical homes are great purchases and full of character, they may also require some extra protection.
Living expenses: The last factor to consider when adding up how much insurance you need are living expenses. In other words, if your home were to become damaged or destroyed, how much would it cost for you to temporarily live somewhere else until your home is rebuilt?
This cost changes based on a variety of factors, so get in touch with your local real estate agent or talk to your insurance provider about how to prepare for this expense too!
Understanding how much homeowners insurance you need to protect yourself and your assets can make all the difference in the event of a disaster or damage to your home. We never know what's going to happen, so it's always best to be prepared.
Count up the cost of rebuilding your home, your possessions and objects you want covered, and how much liability insurance to make sure your assets are covered in the worst-case scenario.
If you're paying too much for homeowners insurance, check out these resources to find out how to lower your payments and save money.