You may be wondering how much homeowners insurance you truly need if you own a property.
After all, the more coverage you have, the higher your premiums will be—and you definitely don’t want to spend more than you have to.
Still, if you don’t have enough coverage, will you be able to repair your home and replace your valuables in the event of a disaster?
The good news is that you can tailor your homeowners insurance policy to ensure you have the appropriate type and level of coverage.
What Is Homeowners Insurance?
A home is most likely the most expensive single purchase you will ever make, so it stands to reason that you would want to protect that investment.
One method to do so is to keep up with the unavoidable repairs and upkeep that keep your home in good shape. Good homeowners insurance coverage is another option.
Homeowners insurance is a sort of property insurance that protects your home and other precious possessions.
A standard policy protects your house and personal items against damage and loss. It also safeguards your assets from liability claims such as personal injury and pet-related incidents.
Also read: The Importance of Property Insurance
Homeowners Insurance Coverage
Each insurance policy covers specific “perils”—the accidents against which you are insured.
Some of the most common risks covered by ordinary homeowners policies, according to the Insurance Information Institute, are:
- Damage from an aircraft, car, or vehicle
- Falling objects
- Fire and smoke
- Lightning strikes
- Riots or civil commotion
- Vandalism and malicious mischief
- Volcanic eruptions
- Water damage (from within the home only)
- Weight of ice, snow, and sleet
- Windstorms and hail
While standard policies cover many different perils, they don’t cover everything, including:
- Floods. Flood insurance is specifically excluded from standard policies, so you must buy it separately. Even if you don’t live in a flood plain, you should still consider flood insurance: 90% of natural disasters in the U.S. involve some type of flooding.3
- Earthquakes. Earthquake coverage is usually available as a separate policy or as an endorsement to your existing homeowner’s coverage.
- Maintenance Damage. Homeowner’s insurance doesn’t cover mold, infestation from termites and other pests, or damage due to lack of maintenance.
- Sewer Backup. Sewer backups aren’t covered by standard policies or by flood insurance. Coverage is usually available as a separate policy or as an endorsement.
How Much Homeowners Insurance Do I Need?
If you have a mortgage, your lender will require a certain level of dwelling and liability coverage, according to Insurance.com.
This insurance protects both your investment and your lender’s.
In contrast, if you do not have a mortgage, you are not required to get homeowners insurance.
Of course, while coverage is theoretically optional, it would be quite hazardous to leave your most valuable asset unprotected.
Instead, it’s a good idea to obtain adequate homeowner’s insurance to:
- Rebuild your home
- Replace your belongings
- Cover injuries and damages that happen on your property
- Reimburse your living expenses while you can’t live in your home
Standard homeowners insurance policies include four categories of coverage to help you achieve these objectives: dwelling coverage, personal property coverage, liability coverage, and extra living expenses coverage.
Recommended coverage: equal to your home’s replacement cost
Dwelling coverage is the portion of your homeowners insurance policy that pays to rebuild or repair your home and any related structures if they are damaged by a covered risk.
Ideally, your dwelling coverage should equal the replacement cost of your property.
This should be based on rebuilding costs, not the value of your property. Depending on your location, the state of your home, and other circumstances, the cost of rebuilding could be greater or cheaper than the original price.
Your insurance provider or an appraiser can help you evaluate reconstruction costs.
You can also estimate the cost by multiplying your home’s square footage by the local building cost per square foot for your type of house.
For example, if your home is 2,000 square feet and local building expenses are $100 per square foot, it would cost around $200,000 to replace it.
A local real estate agent or appraiser should be aware of the usual construction expenses in your area.
Personal Property Coverage
Recommended coverage: enough to replace all your belongings
Personal property insurance covers everything in your home except the house itself, including appliances, clothing, furniture, electronics, sports equipment, toys, and even the food in your refrigerator.
If your belongings are destroyed, stolen, or defaced, the coverage kicks in.
In general, you should get enough coverage to replace everything you own. This figure can be tough to calculate because most people have no idea how much stuff they truly own.
Make an inventory of everything you own: make a full list of what’s in each room and photograph the more valuable objects.
If you have valuable or expensive objects, like as jewellery, musical instruments, high-end sports equipment, or valuable art, you may require additional coverage.
Make a separate inventory of these things, estimate their replacement costs, and inquire with your insurance agent if you require additional coverage for them.
Recommended coverage: As much as you can afford
Your homeowners policy’s liability coverage kicks in if someone is injured on your property.
According to NetQuote, the following are the five most common liability claims that homeowners face:
- Dog Bites. Some dog breeds are considered high-risk and aren’t covered by standard policies. Check with your insurance agent if you have a pit bull, an Akita, a German shepherd, or another dog breed that could be deemed dangerous. Also check to see whether you are covered if your dog bites someone not on your property—at a park, for example.
- Home Accidents. You’re liable even if someone comes onto your property uninvited and gets hurt.
- Falling Trees. You may be liable if a tree on your property falls and hurts someone or damages a car or neighbor’s home.
- Intoxicated Guests. If one of your guests becomes intoxicated, you could be liable for any harm that person causes other people or property.
- Injured Domestic Workers. If you hire people to clean your house or take care of your lawn, you could be liable if they’re hurt on the job.
Most homeowner policies include at least $100,000 in liability coverage. It’s a good idea to increase that to at least $300,000—or more if you can afford it.
You can get an umbrella insurance policy if you require liability coverage that extends beyond your homes insurance policy.
This is especially important if you have a large net worth or a higher-than-average risk of being sued (for whatever reason), operate from home, or serve on a board of directors.
Additional Living Expenses (ALE) Coverage
Recommended coverage: 10% to 30% of your dwelling coverage
If your home was damaged by a fire or a tornado, it could take months or even years to repair. In the meantime, where would you live?
Additional living costs (ALE) coverage is a component of homeowners insurance that functions as an emergency fund if you are temporarily displaced from your home.
It covers things like staying in a hotel or the extra expenditures of eating out when you can’t cook at home.
ALE coverage may also cover the costs of doing laundry, renting furniture, storing household items, and boarding your pet.
According to Insurance.com, most homeowners insurance policies compute your ALE as a percentage of your dwelling coverage—typically 20%.
If you have a large family (and a lot of mouths to feed), you should get the maximum coverage.