Cost & Coverage
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How much homeowners insurance you need depends largely on how at-risk your home is for damage, how much stuff you have, and how likely someone is to get hurt in your home.
Considering your home is your most valuable asset, homeowners insurance is one of the most important forms of financial protection, covering property damage to your home and personal property. Homeowners insurance protects other areas of your life as well, including coverage for your legal expenses if you or family members are found liable in a lawsuit.
Every homeowner knows they need a homeowners insurance policy, but how do you determine how much of each coverage you need? The truth is that every home has vastly different insurance needs depending on where it’s located, how it’s constructed, what’s inside and multiple other factors. A good place for every homeowner to start would be to focus on the following areas:
The answer to those three areas will inform the three most crucial components in your policy: your dwelling coverage, your personal property coverage and your personal liability coverage. Additionally, you’ll want to consider enhanced protection or coverage endorsements if you live in a natural disaster-prone area, own expensive jewelry or electronics, or have multiple high-value assets.
In this article:
Before we delve into the specifics on how to gauge your homeowners insurance needs, here’s a quick look at what the coverage limits might look like for a 2,000 square-foot frame home with a replacement value of $350,000.
|Basic coverages||Policy limits|
|Other structures coverage||$35,000 (10% of dwelling coverage)|
|Personal property coverage||$175,000 (50% of dwelling coverage)|
|Loss-of-use coverage||$70,000 (20% of dwelling coverage)|
|Personal liability coverage||$300,000|
|Medical payments coverage||$5,000|
|Personal property||Replacement cost|
|Water backup coverage||$10,000|
|Ordinance or law coverage||$10,000|
|Jewelry and furs||$2,500 per item / $5,000 overall limit|
Our sample home was determined to have a replacement value of $350,000 which represents the dwelling or home structure coverage limit. The other basic coverage limits are then taken as a percentage of the dwelling coverage limit — although you may be allowed to opt for higher or lower limits depending on the policy.
Our sample homeowner decided to go with $300,000 in personal liability coverage (maximum of $500,000 is available) — a fairly typical coverage limit for a homeowner with modest assets — and the maximum of $5,000 in medical payments coverage. They also elected to equip their policy with some highly recommended coverage endorsements, like replacement cost contents coverage, water backup coverage, ordinance or law coverage, and higher sublimits for their jewelry collection.
One the biggest misconceptions when it comes to homeowners insurance is that you only need enough of it to cover the value of the home; some lenders will only require that you get enough “hazard insurance” to cover the mortgage amount.
The problem with basing your coverage on the market value or mortgage amount on the home is that it’s rarely accurate and you could end up wildly over or underinsured.
What you’re looking to base your insurance amount on is the rebuild cost of the home. Your insurance company will likely provide you with a rebuild estimate based on the information submitted in your application. You can also get more granular if you choose and hire an appraiser to conduct a rebuild appraisal on the home.
There is also a more DIY way to get a very — and we cannot stress this enough — rough estimate of the home’s rebuild value: You simply multiply the square footage of the home by the average cost per square foot to build in your area. You can find the average cost per square foot by contacting a local home builder or contractor.
Aside from local construction costs and the square footage of the home, the replacement value of a home is calculated based on a number of characteristics and details, including:
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A standard HO-3 homeowners insurance policy will insure your home at its replacement cost, meaning you’re reimbursed for the amount that it’d cost to rebuild the home at the current prices of construction and labor — house depreciation notwithstanding.
If your home is insured at its replacement cost for $300,000 and it burns to the ground, your insurance will pay up to $300,000 (minus your deductible) to rebuild the home with materials of similar type and quality. (Your dwelling coverage amount would also go toward debris removal and related expenses from the fire.)
However, a base-level replacement cost policy won’t account for inflation or the increased prices of labor and construction materials after a natural disaster. Additionally, a standard policy typically won’t cover any increase in rebuild costs to satisfy local building codes or ordinances. Luckily, most homeowners insurance companies offer endorsements that you can add to your policy to cover home rebuild fluctuations. Those endorsements include:
Extended replacement cost is a policy endorsement that increases your dwelling coverage by an additional 25-50% of your policy limit. This is a valuable policy safeguard to have if you live in a wildfire or hurricane-prone area or if you're just generally skeptical about the accuracy of rebuild estimates.
Some companies also offer guaranteed replacement cost policies that will pay you whatever it costs to rebuild your home regardless of how much it exceeds your policy limits.
Inflation guard is a coverage endorsement that automatically increases your dwelling coverage limit on an annual basis to account for inflation.
Ordinance or law coverage is a policy endorsement that pays for increases in repair or rebuild costs due to a new local building code or ordinance. Many companies offer up to $25,000 in ordinance or law coverage.
Homeowners insurance also includes personal property coverage of around 50% to 70% of your dwelling coverage amount. If your dwelling is insured for $450,000, your personal property coverage limit will be anywhere from $225,000 to $315,000. But there are a few considerations and nuances that you should be aware of to ensure your belongings are adequately protected.
Your first order of business should be to set up a home inventory of your personal possessions. Having a detailed home inventory on hand not only makes it easier to properly insure your most important valuables, but it’s also the best way to record and keep track of what you own in the event that you need to file a theft or disaster claim.
By default, your home’s structure is protected with replacement cost coverage. However, personal belongings are typically only insured at their actual cash value, meaning depreciation is subtracted from the total reimbursement amount when you file a personal property claim. Item depreciation is based on the physical condition of the item as well as its age, so even if your 10-year-old entertainment system is in mint condition, 10 years of depreciation will still be subtracted from the reimbursement amount.
Most companies will let you upgrade your personal property protection to replacement cost coverage, meaning the company will pay to replace the items at their full replacement value. According to the Insurance Information Institute, it’s usually about 10% more expensive than an actual cash value policy but is well worth the additional premium.
Jewelry, furs, art, instruments, computers and a number of other high-value items are assigned sublimits by insurance companies, meaning you’ll only be reimbursed up to a specified limit for a category of expensive valuables.
Reimbursements for jewelry loss, for example, are usually capped at around $2,000, so if $3,000 in jewelry was stolen from your home you’d have to pay out of pocket to recoup the remaining loss.
If you have high-value property, check with your insurance company to see if they offer a scheduled personal property or personal articles endorsement to increase your coverage limits.
Think about it this way, if someone is injured or hurt in your home and they decided to sue you, how much coverage do you think you’d need? The answer is probably more than your initial guess. That’s because lawsuits are expensive; if you get taken to court and the injured party wins the lawsuit, you’ll most likely be paying their legal fees on top of your own along with the reward, which could end up being astronomically high.
On top of that, the injured party can go after all of your assets in a lawsuit, not simply assets that are attached to the insured property. So if you have $400,000 in assets, you should have at least $400,000 in personal liability coverage.
In the event your assets exceed the maximum personal liability coverage limit ($500,000), consider adding a personal umbrella policy. With umbrella insurance, you can increase your liability insurance to over $1 million and you’re covered against more instances of liability exposure.
If you live in an area susceptible to flooding or earthquakes, your mortgage company may require that you add additional coverage to your homeowners policy to cover those perils, or add separate flood and earthquake insurance policies entirely.
You should also consider water backup coverage.
Most insurers will cover water damage or burst and leaky pipes if the damage was sudden and unexpected, but they won’t cover that pipe that had it coming for months or years. Water backup coverage covers most water damage-related circumstances (except for a leaking pool, irrigation or flooding) and is worth adding to your policy if you live in an older home.
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