How Much Homeowners Insurance Do I Need?

When you buy homeowners insurance, you have a lot of coverage options. But what's the right amount of coverage? We'll help you analyze your coverage choices to make the right decision.

man holding paper that says how much coverage do I need

There's a lot to consider when buying homeowners insurance. One of the most important decisions is how much insurance coverage you need.

What's the point of home insurance? To protect you, your possessions, and your home from the unexpected. Imagine a scenario where your house and everything inside is destroyed by a fire. Ideally, you'll have enough coverage to completely rebuild your home and replace your possessions.

Many factors impact your ideal coverage levels. That includes your house, where you live, and your assets. This article will explore the key parts of a home insurance policy and ideal coverage levels.

What Type of Homeowners Insurance Policy Do You Need?

Before we discuss coverage levels, let's examine the different types of homeowners insurance.

First, there are multiple forms of homeowners insurance. These include:

  • HO-1: Basic
  • HO-2: Broad
  • HO-3: Special
  • HO-4: Tenant's
  • HO-5: Comprehensive
  • HO-6: Condo
  • HO-7: Mobile home
  • HO-8: Older home

Each of these policy types has different coverage levels, exclusions, and costs. For an average homeowner, HO-3 is the ideal home insurance policy. It's the most common insurance type. HO-3 policies cover your home's structure, your belongings, and your liability.

What makes HO-3 better than HO-2 or HO-1? HO-3 covers damages from anything that isn't specifically excluded. HO-2, on the other hand, only covers damages from things that are specifically included. That means that HO-3 covers more incidents. Plus, an HO-3 policy is not considerably more expensive than an HO-2 or HO-1 policy. The difference in coverage levels is more than worth the difference in price.

Since HO-3 is the most common policy type, this article will focus on an HO-3 policy. Even if you decide that HO-3 isn't right for you, most other policies have similar coverage options. This article can still help you decide on coverage levels regardless of your HO form.

Now, let's breakdown what goes into your homeowners insurance policy.

How Much Homeowners Insurance Coverage You Need

There are four key components that make up a homeowners insurance policy:

  1. Dwelling/structure coverage: This covers the physical structure of your home. In other words, the foundation, roof, walls, and all the materials within.
  2. Personal possessions/property coverage: This covers the stuff inside your home. That includes computers, clothes, furniture, and more.
  3. Liability coverage: You have a responsibility to reasonably ensure the safety of people in your home. Liability coverage protects you from legal issues if someone is injured on your property. Injuries can range from dog bites to falls. If a court finds you legally responsible for someone's injuries, your assets are at risk of a lawsuit.
  4. Additional living expenses: If your home is unlivable due to a covered incident, additional living expenses (ALE) help you pay for temporary housing, food, and more.

That's the basic run-down of a home insurance policy. So, what's the right coverage amount for you? We'll discuss ideal coverage levels for the four main tenets of home insurance:

Structure and Dwelling

First, you need enough structure or dwelling coverage to completely rebuild your home from the ground up. That means you will need to calculate your home's replacement cost, which is a tricky task. Don't mistakenly assume that your home's replacement cost is the same as its value. Replacement cost does not account for land or market value. It's simply the cost of rebuilding your home – including materials and labor.

Personal Property

Your structure coverage amount is important. Why? Other coverage types are calculated based on it. That includes personal possessions or property coverage. Policies usually set your possessions coverage between 50 to 75 percent of your dwelling coverage. For most people, that's enough.

In order to find out if it's enough for you, you'll need to create an inventory list. Estimate the total value of your belongings. Is your property coverage enough to replace them? And do you have any high value items? As we'll discuss later, people with high-value items can bolster their coverage with a rider

One vital aspect of your possessions coverage is how your items are valued. In other words, how much money will your insurer give you if your stuff is stolen or destroyed? There are two approaches: actual cash value (ACV) or replacement cost. Replacement cost is simply the price to replace your item with a brand-new version. Actual cash value, on the other hand, accounts for depreciation and market value.

Pretend your couch is destroyed in a house fire. You bought it for $1,500 five years ago. With replacement cost, your insurance company reimburses you the full $1,500. With ACV, the insurance company considers market value and depreciation. Since the couch is five years old, they may price it at $800, for example.

That's why replacement cost offers better protection for your possessions. However, that extra layer of protection isn't free. Replacement cost policies are more expensive than ACV. If you can afford it, choose replacement cost. Read our article on replacement cost and actual cash value for more information.

Liability

Liability coverage usually starts at $100,000. That may seem like a lot. But if you need to use your liability coverage, you can easily use up that entire amount. Simply put, lawsuits are expensive. We recommend you purchase at least $300,000 in liability coverage. The difference in cost between $100,000 and $300,000 in liability isn't enormous.

If you have large assets or other properties, additional liability is a must. If necessary, you can purchase an umbrella policy to bolster your liability protection. We'll discuss that more below.

Additional Living Expenses

Like possessions coverage, additional living expenses (ALE) coverage usually depends on your dwelling coverage amount. It's also limited depending on your HO form:

  • HO-2: 30 percent of dwelling limit
  • HO-3: 30 percent of dwelling limit
  • HO-4: 30 percent of personal property limit
  • HO-5: 30 percent of dwelling limit
  • HO-6: 50 percent of personal property limit
  • HO-8: 10 percent of dwelling limit

The numbers listed above are limits. Insurance companies commonly set ALE coverage at about 20 percent of the dwelling/structure coverage. At 20 percent, if you have $300,000 in dwelling coverage, you'll have $60,000 in ALE. Fortunately, most people will never need to use their additional living expenses.

Additional Home Insurance Coverage Options

Remember; each house, city, and person is unique. It's impossible to take a one-size-fits-all approach to home insurance. Because of that, there are diverse coverage options available beyond a standard policy. These include:

  • Flood insurance: It's a common misconception that home insurance covers flood damage. That's not the case. Flood insurance must be purchased separately. Research your city's flood likelihood. If your home is at risk of flood damage, proper coverage is a must. Even if you live in a 'safe' area, floods are still a possibility. In fact, according to the NFIP, nearly 25 percent of flood-damage claims came from areas with low or moderate flood risk.

    If you have a mortgage on a home in an area with flood risk, your lender will require flood insurance. The required coverage amount is equal to the house's replacement cost. Even if your home isn't in a flood-prone area, you should still buy flood insurance. We recommend you buy coverage equal to the value of your home and possessions. You can purchase flood insurance from the NFIP or a private insurer.
  • Other structures: Many standard home insurance policies don't cover structures aside from the house itself. These structures can include gazebos, sheds, and detached garages. If your property includes any such structures, make sure they're covered.
  • Umbrella coverage: As we mentioned, if you have large assets, you're going to need additional liability. People who need additional liability protection can purchase an umbrella policy. This policy add-on will cover monetary damages that exceed your liability limit. When you consider how expensive a lawsuit can be, an umbrella policy is a good choice.
  • Riders: Most policies provide belongings coverage at 50 to 70 percent of your structure coverage. For many people, that's enough. But if you have unique items, jewelry, antiques, art, or other valuables, you might need more coverage. In that case, purchase an insurance rider or endorsement.

    Even if you think your belongings coverage is adequate, double check the numbers. Most home insurance policies set limits for specific items. Your policy might only provide $1,500 in coverage for jewelry, for example. Your total belongings coverage may technically cover the cost of all your possessions. But if you have more than $1,500 worth of jewelry, you're not fully covered.

What Should Your Homeowners Insurance Deductible Be?

When you purchase home insurance, you set a deductible. Your deductible is the amount you pay out-of-pocket when you file a claim. If you have a $2,000 deductible, for example, that's the amount you pay before your insurance covers the rest.

Some policies decide your deductible by a percent of the replacement cost. So, if your house is insured for $200,000 and you have a one percent deductible, your deductible is $2,000. You can change the deductible, but it will alter your premium.

What's the ideal amount for a deductible? The first thing to consider is your budget. An insurance plan with a high deductible has lower monthly premium. That may seem great at first. But if you need to file a claim, you may end up losing money overall because of the high out-of-pocket costs.

Consider a few factors. Can you pay for minor damages out of pocket? Are you risk averse? Have you filed claims in the past? Do you live in an area with high crime rates or disaster risk? Pick a deductible that works in two ways. First, it won't break your bank if you need to file a claim. Second, it won't make your premium sky-high.

In other words, there's a lot to consider. When it comes down to it, picking a deductible is a personal choice. For more information, read our article on how to choose the right home insurance deductible.

Frequently Asked Questions

Q: Is there a legal minimum amount of home insurance?

A: Unlike car insurance, homeowners aren't legally required to insure their house. However, lenders and mortgage companies always require insurance coverage. Why? The house isn't fully paid off, meaning the mortgage company still owns a percentage of the home. Because of this, they require insurance to protect their investment.

Their required coverage level is usually a minimum part of your mortgage loan amount. Mortgage companies will also require additional hazard coverage if you live in an area at risk for hurricanes or earthquakes, for example. If you live in a designated flood plain area, your lender will require flood insurance.

If you own 100 percent of your home, there is no legal insurance requirement. However, that doesn’t mean it’s a good idea to skip out on coverage.

Q: How do I know if I have enough homeowners insurance?

A: Do a math equation. Imagine that your home and everything inside is completely destroyed by a fire. Do you have enough coverage to rebuild and replace everything? After all, that's what home insurance is for.

Calculate your home's replacement cost. Is your dwelling/structure coverage enough to rebuild your home from the ground up? Similarly, create a home inventory list of all your possessions. Is your personal property coverage enough to replace every item on that list?

You should also consider your liability levels. Are they enough to protect you from legal proceedings? Liability is especially important if you have considerable assets.

Ideally, you will have enough home insurance to be able to return to (relatively) normal life if your home is unlivable. Remember that when shopping for home insurance.

Q: My mortgage company requires insurance. Is their required coverage amount enough?

A: Your lender's required insurance level exists to protect their investment – not yours. If you still owe money on a home, your required insurance is probably going to cover the portion that you owe. That means that whatever equity you own isn't covered.

On top of that, your mortgage company must be named as a "loss payee" on your policy. That means that your lender has first dibs on any claim payouts. You will only receive funds that are signed off on by the lender, after they've taken their cut.

In other words, don't assume that you have enough coverage just because you purchased the amount required by your lender. You need additional insurance to have full coverage.

Q: How do I estimate the replacement cost of my house?

A: Calculating your replacement cost isn't an exact science. Labor costs are elastic, and labor is a big part of a replacement cost.

What you can (and should) do is make an educated guess to assess a house's replacement cost. There are a few different ways to do this:

  1. Hire an appraiser
  2. Use replacement cost calculating software
  3. Consult a local contractor for an estimate
  4. Do your own math
  5. Get quotes from multiple insurance companies and compare their rates

It's a good idea to try several of the above approaches. That will help you understand the range of replacement cost values assigned to your home. You will be able to assess whether your current replacement cost is accurate.

Q: Do I need flood insurance?

A: Do you live in a designated flood plain area? If so, the answer is yes, you do need flood insurance.

But even if you don't live in a flood plain area, flood insurance is a good investment. Starting at $39 per year, low-risk flood insurance is affordable. On top of that, many people who live in areas with low flood-risk have suffered from flood damage. In fact, FEMA estimates that 25 percent of flood insurance claims come from areas with low to moderate flood-risk.

QuoteWizard.com LLC has made every effort to ensure that the information on this site is correct, but we cannot guarantee that it is free of inaccuracies, errors, or omissions. All content and services provided on or through this site are provided "as is" and "as available" for use. QuoteWizard.com LLC makes no representations or warranties of any kind, express or implied, as to the operation of this site or to the information, content, materials, or products included on this site. You expressly agree that your use of this site is at your sole risk.