Nobody ever wants to think about hypothetical worst-case scenarios. Unfortunately, there’s no way around it when you’re contemplating which homeowners policy to go with and exactly how much coverage you need.
While your insurance company will suggest recommended coverage limits, educating yourself will ensure that you have proper protection when disaster strikes.
How much homeowners insurance do I need?
When it comes to purchasing homeowners insurance, there’s no one-size-fits-all policy. Figuring out how much homeowners insurance you need requires you to estimate how high costs would be in situations where your home and your belongings are damaged, stolen, or destroyed.
To make sure you aren’t underinsured, you’ll have to figure out how much insurance you need in four areas: the structure of your home, your personal belongings, liability protection, and additional living expenses.
1. How much insurance do you need for your home?
One of the most obvious coverage areas your homeowners policy includes is the physical structure of your home. Your policy insures your home against a list of ‘perils’, such as fire, lightning, and even vandalism.
So how much coverage do you need? That depends on how much it would cost to rebuild your home from scratch, for example, after a fire. Your coverage limits are not based on the market value of your home.
If you have a mortgage, your lender will have made this coverage (sometimes called hazard insurance) a condition of your loan.
If you’re worried that you are underinsured, you can do a bit of the math. You can easily find out this information by working with a local contractor or construction company. From there, you’ll multiply that number by the total square footage of your house and that will give you a rough estimate of how much it would cost to rebuild your home.
Things to keep in mind
You’ll want to consider the quality of your home as well. You should factor in things like the type of building materials used, custom structures in your house, expensive appliances, flooring, cabinets, windows, etc.
These kinds of details are important if you were to rebuild your home from the ground up and will impact rebuilding costs.
2. How much personal property insurance do you need?
Most standard homeowners policies have personal property coverage and will protect the items in your home if they are damaged, destroyed, or stolen in a disaster. This includes personal belongings like furniture, appliances, clothing, jewelry, and electronics.
Your policy will have a coverage limit that is a percentage of your home’s insured value. The exact percentage will vary from policy to policy.
An easy way to check if the coverage amount is right for you is to create a home inventory list.
There are plenty of tools out there to help you make a home inventory, including apps and online guides.
When making a list of your items, take note of the following: the make, model, serial number, and where/when you bought it. This process will be easier if you can find the receipts or credit card statements.
After you’ve gathered all that information, add up the total and compare it to what the default coverage amount is. From there, it’s up to you to contact your insurance company if the coverage is too low or too high.
Insuring for the value of your expensive items
You should also check your policy to see how it covers high-value items. This means things such as jewelry, artwork, and antiques.
Most standard policies will only cover these things up to an assigned dollar limit. If the total value of the relevant items exceeds that, you should ask about purchasing a separate policy to increase the coverage limit.
Actual cash value vs. replacement cost
When figuring out how much home insurance you need, pay attention to how a claim will be settled. There is a difference between actual cash value and replacement cost. Actual cash value is the price that you paid for of an item, minus depreciation. Replacement cost, meanwhile, would cover the amount to replace the items as brand new.
Even though replacement cost coverage costs more, this coverage could be worth it. It provides you with the money to replace your items new rather than leaving you to pay any shortfall from your claim.
3. How much liability insurance do you need?
Liability insurance covers the costs of a lawsuit if you injure someone or destroying someone’s property. It even covers your pets in a case where your dog bites someone.
Most policies come with a minimum of $100,000 in liability insurance. According to the Insurance Information Institute limits of $300,000 or even $500,000 are becoming increasing common.
How do you work out what limit is right for you? The purpose of any liability insurance, home or auto insurance, is to protect your assets if somebody sues you. Your policy limit should match the value of these assets.
Do the math to work out the value of your assets (property, investments, and savings). If your current policy doesn’t have enough you’ll need to think about increasing the liability limits in your policy.
4. Additional Living Expenses (ALE)
If you can’t live in your home during repairs or rebuilding, ALE covers any additional costs while you’re temporarily staying somewhere else. This means things like hotel or rent, meals, gas, storage fees, and moving costs.
In a worst-case scenario these costs could really start to add up. Remember that you are entitled to maintain your standard of living so factor this in. Your temporary stay elsewhere could last until a year. You should think about finding a place that’s going to be comfortable and convenient for you and your family.
The limit on ALE varies with each policy, but it’s usually a percentage of your home’s insured value or personal belongings. It’s always wise to ask your agent about ALE coverage. You can work with them to determine if this will be enough to cover your expenses while you’re living somewhere else.
Finding the best policy and coverages for you
It’s never expected of you to know everything about insurance, but just doing some research on your own can ensure that you, your family, and your property are covered.
If you are shopping around for a homeowners policy, let Cover do the work. We search more than 30 insurance companies to find the best rate for you.