You may wonder how much homeowners insurance you need if you own a home. Ideally, you should have enough homeowners insurance to cover the replacement cost to rebuild your home. Also, you'll need enough insurance to cover the value of your personal belongings and liability insurance of $100,000 to $300,000 if someone gets injured on your property.
The amount of homeowners insurance you need depends on the property's size and its location. For example, you may need additional coverage if you live in a region prone to earthquakes and floods. Also, if you have high-value items, like jewelry, a standard homeowners insurance policy may not provide adequate coverage.
The good news is that you can fine-tune your homeowners insurance policy to ensure you have the right type—and the right amount—of coverage.
Key Takeaways
- Homeowners insurance covers losses and damages to your home and belongings and protects your assets from liability claims.
- Since standard policies don’t cover everything, you may need additional coverage for perils such as floods and other natural disasters.
- Your insurance agent can help you decide the type and amount of coverage you need.
What Is Homeowners Insurance?
A home is likely the largest single purchase you’ll ever make, so it makes sense that you would want to protect that investment. One way to do that is to stay on top of the inevitable repairs and maintenance that keep your home in good condition. Another way is to buy a good homeowners insurance policy.
Homeowners insurance is a type of property insurance that safeguards your home and other valuable items. A standard policy covers damage and losses to your home and personal belongings. It also protects your assets from liability claims, such as personal injuries and pet-related incidents.
The more coverage you buy, the higher the monthly premiums. On the other hand, if you don’t have enough coverage, you would need to pay out of pocket to rebuild your home and replace your belongings if a covered peril occurred.
Homeowners Insurance Coverage
Each insurance policy covers certain “perils” or covered events. Some of the most common perils covered by standard homeowners policies include:
- Damage from an aircraft, car, or vehicle
- Explosions
- Falling objects
- Fire and smoke
- Freezing of plumbing systems
- Lightning strikes
- Riots or civil commotion
- Theft
- Vandalism and malicious mischief
- Volcanic eruptions
- Water damage within the home from accidental discharge, including from plumbing or heating
- Weight of ice, snow, and sleet
- Windstorms and hail
56%
The percentage of homeowners who incorrectly believe flood damage is covered by their standard policy
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 as a separate policy. 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.
- Earthquakes: Earthquake coverage is usually available as a separate policy or as an endorsem*nt to your existing homeowner’s coverage.
- Maintenance damage: Homeowners 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 endorsem*nt.
How Much Homeowners Insurance Do I Need?
If you have a mortgage, your mortgage lender will require a minimum amount of dwelling and liability coverage. That coverage protects your investment—as well as your lender’s.
Nearly one in 13 homes in the U.S., or 7.4%, are underinsured.
Conversely, if you don’t have a mortgage, you don’t have to buy homeowners insurance. Of course, while coverage is technically optional, it would be very risky to leave what’s probably your largest asset unprotected. Instead, a good rule of thumb is to have enough homeowners 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 have four types of coverage that help you reach these goals: dwelling coverage, personal property coverage, liability coverage, and additional living expenses coverage.
Dwelling Coverage
Recommended Coverage: Equal to Your Home’s Replacement Cost
The dwelling coverage part of your homeowners insurance policy helps pay to rebuild or repair your home and any attached structures—such as a garage, deck, or front porch—if damaged by a covered peril.
Ideally, your dwelling coverage should equal your home’s replacement cost, which is based on rebuilding costs—not your home’s price. The cost of rebuilding could be higher or lower than its price, depending on location, the condition of your home, and other factors.
Your insurance agent or an appraiser can calculate rebuilding costs for you. Alternatively, you can estimate the cost by taking your home’s square footage and multiplying it by the local building cost per square foot for your type of house.For instance, if your home is 2,000 square feet, and the local building costs are $100 per square foot, it would cost about $200,000 to replace your home. A local real estate agent or appraiser should know the average building costs in your area.
Be sure to review your homeowners insurance policy to determine whether detached structures are covered. If not, you may need to buy an additional policy for other structures coverage.
Personal Property Coverage
Recommended Coverage: Enough to Replace All Your Belongings
Personal property coverage applies to everything in your home besides the house itself—appliances, clothes, furniture, electronics, sports equipment, toys, and even the food in your fridge. The coverage kicks in if your belongings are destroyed, stolen, or vandalized.
In general, you should have enough coverage to replace all your belongings. This amount can be really difficult to estimate, as most people have no idea how much stuff they actually own. A good idea is to make an inventory of everything you own: write down a detailed list of what’s in each room and take photos of the more expensive items.
If you have expensive or rare items—including jewelry, musical instruments, high-end sports equipment, or valuable art—you may need additional coverage. Make a separate inventory for these items, write down their estimated replacement costs, and ask your insurance agent if you need additional coverage.
Liability Coverage
Recommended Coverage: As Much as You Can Afford
Liability coverage is the part of your homeowners policy that kicks in if someone is hurt on your property. There are five 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 who is 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 injured on the job.
Most homeowners insurance policies have at least $100,000 in liability coverage. Increasing the coverage to at least $300,000 may be prudent if you can afford it.
If you need liability coverage beyond your homeowners insurance policy, you can buy an umbrella insurance policy. This can be particularly beneficial if you have a high net worth or a higher-than-average risk of being sued (for whatever reason), work from home, or volunteer on a board of directors.
Additional Living Expenses (ALE) Coverage
Recommended Coverage: 10% to 30% of Your Dwelling Coverage
If a fire or tornado destroyed your house, it could take months or even years to rebuild it. Where would you live in the meantime?
Additional living expenses (ALE) coverage is the part of your homeowners insurance that acts like an emergency fund if you’re temporarily displaced from your home. It covers things like staying in a hotel or eating at restaurants when you can’t cook at home. This coverage may also reimburse you for the costs of doing laundry, renting furniture, storing your household items, and boarding your pet.
Most homeowners insurance policies calculate 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 may need higher coverage.
Frequently Asked Questions (FAQs)
What Is the Difference Between Home Warranty and Home Insurance?
A home warranty provides discounted repairs and replacements of covered household appliances and home systems (like HVAC, plumbing, and electrical systems) in exchange for a monthly or annual fee. Home insurance protects your home and personal belongings against losses and damages caused by covered perils (fires, windstorms, explosions, vandalism, theft, etc.)
What Is the Difference Between Homeowners Insurance and Mortgage Insurance?
Homeowners insurance protects your home and its contents, while mortgage insurance protects your mortgage lender in case you can’t meet your mortgage payments.
Is Homeowners Insurance Mandatory?
While it's not required by state or federal law, your mortgage lender will require you to have homeowners insurance until your loan is paid in full.
The Bottom Line
Talk with your insurance agent to determine if you have the right type—and right amount—of homeowners insurance coverage. Often, it doesn’t cost nearly as much as you might expect to go from a so-so policy to excellent coverage that will keep you well-protected (and let you sleep at night).
