Updated October 2, 2019

How Much Home Insurance Do I Need

Read more about Home Insurance

61% of US homes are underinsured. What mistakes should you avoid when shopping for a home insurance policy? Read our guide for more info on buying home insurance.

Homes are large investments and should be insured to their full value. But understanding the term value is where homeowners often go wrong.

In other words, many people tend to understimate what their home is worth.

Home value is determined by:

  • Cost to rebuild your home

  • Cost replace all its possessions

  • Cost to protect you from liability that occurs on, in, and around your property

Home value is NOT:

  • What you paid for the house

  • The amount of your mortgage

  • What you can sell the house for on the current market

  • The amount your city or town uses to evaluate your home for tax purposes

Keep reading to learn more.

How much is the average house insurance policy?
In 2019, the average annual cost of homeowners insurance is $1,083. Depending on where you live, that average cost can vary from $600 to $2,000 per year.

What Is the 80% Rule in Insurance?

The whole point of home insurance is to help you out financially if your home suffers a major loss. The 80% rule works out like this:

Your home insurance company covers your home for 80% of the property's replacement cost. You are responsible for the remaining 20%, plus your deductible.

The 80% minimum replacement cost coverage applies to your policy's dwelling coverage. However, you can also select replacement cost coverage for your policy's additional structures and personal property coverages.

The 80/20 rule is the recommended minimum. However, it's best to insure your home to its full value. The cost is 10% higher, but when a major loss occurs, you'll only be out-of-pocket cost for the deductible.

Here's a look at the 80% rule in action:

  • The replacement cost coverage on your dwelling is $240,000, which is 80% of its $300,000 value.

  • Your policy has a $1,000 deductible.

  • Your home is a total loss after a fire.

  • To rebuild it, your insurance company pays $239,000 (the amount of your policy's dwelling coverage minus your policy's deductible).

  • You pay $61,000 (the remaining 20% and your $1,000 deductible).

Now, compare the out-of-pocket costs of the 80% rule to full replacement cost coverage:

  • The replacement cost coverage on your dwelling is $300,000, which is your home's full value.

  • Your policy has a $1,000 deductible.

  • Your home is a total loss after a fire.

  • Your insurance company pays $299,000 (the amount of your policy's dwelling coverage minus your policy's deductible).

  • You pay $1,000, which is your policy's deductible.

What's Covered in a Homeowners Insurance Policy?
A home insurance policy is made up of five parts, each with a separate coverage amount and cost:

  • Dwelling Coverage protects your home's structure.

  • Other Structures Coverage covers what's not physically attached to your home, like a fence, shed, garage, barn.

  • Personal Property Coverage covers everything inside your home.

  • Additional Living Expenses Coverage pays if you have to temporarily move out of your home due to a loss or natural disaster.

  • Personal Liability Coverage protects you financially if someone gets hurt on your property or if a member of your household causes harm to someone else's property.

How Much Home Insurance Is Enough?

To find the right home insurance coverage, start by deciding which level of coverage you want. Read on to learn the different levels of coverage.

Actual Cash Value (ACV)
Lots of things in your home will depreciate with age, like plumbing, roofing, floorboards, etc. If they need to be replaced due to a loss, the new materials usually cost more than those aging ones in your home.

With ACV, you have to pay the difference between how much the insurer pays and how much the new materials cost.

Here's an example:
Your basement floods during a bad storm. The old wooden flooring is ruined. What cost only $7,000 to install back originally now cost $12,000. Since you selected ACV for your level of coverage, here's how it works:

  • You pay the policy's $500 deductible.

  • Your home insurance company pays $6,500 ($7,000 actual cash value minus your $500 deductible).

  • You pay the remaining $5,000 out of pocket.

A policy with Actual Cash Value costs less, keeping the price of your home insurance low. But, you have to pay more out of pocket when a loss occurs.

Replacement Cost Value (RCV)
With this coverage, the insurance company covers the current cost of building materials and labor, up to the policy's limits.

Here's an example:.
In the same scenario as above, installing a new wood floor in the basment will cost $12,000. But:

  • You pay your policy's $500 deductible.

  • Your home insurance company pays $11,500 ($12,000 replacement cash value minus your $500 deductible).

  • You have no out-of-pocket costs with RCV.

With Replacement Cost Value, your home insurance policy costs more because the insurance company is paying more.

Guaranteed Replacement Cost (GRC) or Extended Replacement Cost (ERC)
Thece coverages function like RCV - with one key difference - they extend your policy limits.

  • GRC pays for whatever the cost may be to rebuild your home after a covered loss.
  • ERC pays 20% over your policy's limits.

In the event of a loss, the insurance company will pay the policy-specified percentage over the coverage's limits.

Here's an example:
A tornado damages thousands of homes in an area. The demand for home rebuilds drives up building materials and labor costs. The extended policy limit means your insurer covers the increase in current prices.

GRC and ERC are more expensive than RCV, so you'll pay significantly more for your home insurance policy.

Calculating Your Total Coverage Amount

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A home insurance policy lists each coverage it provides separately, along with the coverage's limit and cost.

You'll have to determine the amount of home insurance you need for each of these coverages:

  • Dwelling
  • Other Structures
  • Personal Property
  • Personal Liability
  • Additional Living Expenses

Keep reading to learn how to determine the coverage you need for each category.

Underinsured means you do not have enough home insurance for one or more of these coverages. Homeowners often don't properly calculate the value of the home itself and the stuff inside it. (More on that below).

Coverage for Your Home's Structure

Your policy's dwelling coverage amount represents how much your home insurer will pay to rebuild your home. This is an important coverage where you want to be adequately insured.

Fire, lightning, and a natural gas explosion are just some of the disasters that can cause damage to your home's structure.

Rebuilding a home costs a lot of money. Being underinsured in dwelling coverage will cost you heavily in out-of-pocket costs.

How to calculate:

  1. Measure the square footage of your home. You can also refer to the deed of your home or tax records at your city or town hall.

  2. Multiply your home's square footage by local construction costs.

    How to find construction cost:
    • Check websites of construction companies in your area
    • Use an online home replacement cost calculator
    • Hire an appraiser or professional estimator
    • Contact a local real estate agent
    • Ask your home insurance agent; many home insurance companies have software to estimate a home's replacement cost
    • Contact a local builders association

  3. Add in the cost of special features unique to your home. These might include:
    • Custom-built sections of your home.

    • Improvements you've made over the years, like a kitchen remodel or adding a second bathroom.

    • A historic or older home with features that are hard to replace, such as carvings or ceiling moldings.

The final dollar amount represents the least amount of coverage you should buy for the structure of your home.

Coverage for Your Belongings

Personal property coverage replaces your possessions if they are stolen, damaged, or destroyed in a disaster.

Personal property includes:
  • Appliances
  • Computers
  • Furniture
  • Electronics
  • Sport and exercise equipment
  • Recreational equipment, like bikes
  • Food in your refrigerator and freezer
  • Room furnishings
  • Decorative items, like vases
  • Clothes
  • Jewelry
  • Artwork
  • Collections, like coins or sports memorabilia

Insurance companies limit personal property coverage to a certain amount. For expensive items, like fur coats, fine jewelry, and musical instruments, you may need to add a separate personal property rider to your policy.

Most home insurance companies determine your personal property coverage using this simple formula: 50 to 70% of your dwelling coverage amount.

Often, this formula isn't enough for most homeowners. This is especially true for those with large families or homes with premium furnishings, lots of electronics, or high-tech appliances.

How to calculate:

  1. Do a home inventory of all your valuable belongings. You can record or take pictures of your valuables, or use a home inventory app. Along with each item, add the make and model, serial number, place and date of purchase, and price paid.

  2. Remember to include the things in your garage, shed, and other attached and detached structures on your property. Also include anything stored in a self-storage facility.

  3. Add everything up and keep a running total. Adjust it each time you buy something new or replace an item.

    The final dollar amount represents how much it would cost to replace your belongings. This is how much personal property coverage you should have.

Your home inventory list also comes in handy when filing an insurance claim if your belongings are stolen, destroyed, or damaged. It also can be used to verify your losses on your income tax return.

Coverage for Personal Liability

The personal liability coverage of a homeowner's policy provides protection against lawsuits. Liability lawsuits can be brought against you if:

  • Someone suffers bodily injury while on your property.

  • You or a family member causes property damage to another homeowner.

  • Your pet harms a person.

Generally, homeowner's insurance policies offer a minimum of $100,000 in personal liability coverage. However, depending on your assets, you may want to purchase up to $500,000 in coverage.

Your policy's liability coverage pays for:

  • Lawsuit settlements
  • Property damage
  • Medical bills
  • Court costs
  • Damages awarded

How to calculate:

  1. Add up the value of your home and personal property.

  2. Add in your financial assets, including:

    • Other property and real estate.

    • Vehicles in the homeowner's name

    • Checking and savings account balances

    • Investments

    • Retirement funds (in some states, they are not totally protected from a lawsuit)

    • Any expected inheritance

  3. Add in the yearly salary of all those working in your household.

This amount determines the best amount of personal liability insurance for your household.

If you have property, savings, or investments worth more than your policy's liability coverage, you may want to consider adding a personal umbrella policy to your home insurance. This policy provides separate excess liability coverage.

Coverage for Additional Living Expenses

Additional living expenses coverage pays for your daily living expenses if your home is uninhabitable due to a loss or natural disaster.

It kicks in when you and your family have to temporarily live elsewhere while your home is being rebuilt or repaired.

Coverage is provided for:

  • Moving or displacement costs
  • Hotel room or rental of other accommodations
  • Restaurant bills
  • Increased transportation costs
  • Furniture rentals, such as a crib or other special items you had in your home
  • Laundry and dry cleaning
  • Utility and cable setup fees
  • Pet boarding
  • Anything else to maintain your standard of living

Additional living expenses coverage only pays for expenses that go above your current standard of living.

How to calculate:

  1. Tally the weekly living expenses for your family. Include food, laundry, and other daily living expenses. You may already have this cost in your weekly or monthly budget.

  2. Add in any weekly rental income you receive from renting a room or apartment on your property.

  3. Add in any weekly business income you receive from working at home or using part of your home for a business, such as daycare.

  4. Calculate all your weekly living expenses. Multiply them by 26 weeks. This is the minimum amount of additional living expenses coverage you should have.

Keep a document of your normal living expenses in a safe place so you can provide it to your insurance company in case questions arise.

Evaluating Home Insurance Companies

The best way to determine whether a home insurance company is right for you is to look at these five main factors:

Customer Service
The agent should take the time to confirm the accuracy of your coverage calculations with the company's own coverage determination method.

The homeowner's insurance policy should closely match the coverages and coverage amounts you need. If you want higher limits on certain coverages that are not offered, seek another insurer. It's important not to be underinsured.

Home insurance rates vary among insurers, so definitely shop around. Just be sure you are comparing coverage to coverage.

Claims Service
You want a home insurance company that has a good track record for paying out claims quickly and fairly. Check with the Better Business Bureau as well as online review sites to see what customers who filed claims are saying.

Insurance Rating
You want an insurance company that is financially strong and has the money to pay your claims. Check online with insurance rating companies A.M. Best, Standard & Poor's, or Moody's. Choose a company with an "A" or a "High" rating.

Buying Home Insurance

There's a lot to consider when selecting a home insurance company, including:

  • The cost to protect your investment

  • How well the homeowner's insurance policy matches your needs

  • The company's response performance after a disaster strikes

  • The financial security of the company

The price of home insurance varies based on the threat of natural disasters. For example, home insurance in Louisiana, Mississippi, and Florida costs more due to hurricane risk. The same holds true in North Dakota, which is at risk for tornadoes and flooding.

Once you've calculated how much home insurance you need, seek out a home insurance company. There are several way to do this:

  • Use the internet to compare quotes and coverages. This is a good way to find which insurers offer the most competitive rates and which ones best match your home insurance coverage needs.

  • Check to see if your current auto or life insurer offers home insurance. Most insurance companies offer a multi-policy discount for having more than one line of insurance with them.

  • Get referrals from family members, friends, neighbors, coworkers, etc. They likely have first-hand experience with the company's customer service and claim service.

  • See if you qualify for any group plans through work or from an organization or association in which you are a member.

  • Look around your local area. Many major insurance companies have sales offices throughout the country. If not, there is sure to be an independent insurance agent or agency in your neighborhood.

There are two different types of insurance agents.

Captive agents represent the insurance company for which they work. They only sell their company's insurance products.

Independent agents represent the consumer rather than one particular insurer. They have access to insurance products from numerous companies. This access makes it easier to compare home insurance policies among different carriers.

Bottom Line

Your home is a major investment that deserves proper insurance protection. Many owners underinsure their property simply because they aren't aware of how much coverage they need.

Take the time to calculate how much coverage you need to fully protect your home, your belongings, and your personal liability.

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