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byDeante' Peake - Licensed Property & Casualty Producer
Deante' Peake - Licensed Property & Casualty Producer
Operations Sales Manager, Property & Casualty
Updated January 14, 2022|5 min read
Table of Contents
The rebuild cost of your home
The total value of the personal belongings in your home
The value of your combined assets
The value of your monthly living expenses
A Policygenius expert can help you figure out exactly how much coverage you need and compare quotes from the best companies on the market to ensure you’re getting a good deal. They can even help you bundle your home and car insurance together so you have fewer companies to deal with — and help you score a discount to boot!
You should have enough homeowners insurance to cover a complete rebuild of your house, replace all of your belongings, and cover all of your combined assets.
If you have lots of expensive valuables, you’ll need more than the standard amount of personal property coverage to protect them.
Your personal liability coverage should be high enough to cover the value of your assets, including your house, cars, belongings, investments, and future earnings.
Homeowners insurance protects your home and personal belongings in case they’re damaged in a covered event, like during a natural disaster. It also covers your personal assets in case someone is injured at your home and you’re sued for damages.
There are six main types of coverages included in a standard homeowners insurance policy:
Other structures coverage
Personal property coverage
Personal liability coverage
Medical payments to others coverage
Additional living expenses coverage
How much you need for each depends on the rebuild cost of your home, the value of your belongings and assets, and your typical living expenses.
We break down how to figure out how much you need for each type of coverage below.
That means if your home’s replacement cost is $400,000, you should have $400,000 in dwelling coverage so you can afford to rebuild it from the ground up if disaster strikes.
If you don’t have enough coverage to fully protect and rebuild your home, you’ll have to foot the bill for any remaining repairs, which could end up costing you thousands of dollars.
Home insurance isn’t based on your home’s market value
Homeowners insurance is based on the rebuild cost of your home — also known as the replacement cost — not its market value. Depending on the current state of the real estate market, your home’s replacement cost could be more or less than its market value — or how much buyers are willing to pay for it.
There are many factors that affect a home’s rebuild cost, including:
Local construction costs
Your home's square footage
Number of bathrooms and other rooms
Style of your home — colonial, ranch, farmhouse, craftsman, etc…
Type, materials, and age of your roof
Special features of your home — fireplaces, crown molding, arched windows, etc…
Whether your home was custom built
Insurance companies will provide you with a rebuild estimate based on the information submitted in your application — but if you want to get a rough idea of how much your home’s rebuild value is, there is a simple way to do it:
Multiply the square footage of the home by the average cost per square foot to build in your area.
You can also use this same method to calculate the rebuild cost of other structures on your property, which we’ll get into more next.
Rising construction costs could leave you underinsured
Home insurance doesn’t account for inflation, the increased prices of labor and construction materials after a natural disaster, or the cost of bringing an older home up to code during a rebuild. Check with your insurance company to learn if they offer any coverage add-ons that you can add to your policy for an additional fee, like inflation guard or ordinance or law coverage. This ensures you have enough coverage to fully rebuild your home — even if construction costs rise.
Other structures coverage pays to replace or rebuild other structures on your property not attached to your home. This might include detached garages, sheds, fences, and guest houses.
Other structures coverage is typically set at around 10% of your home’s dwelling coverage. So if your home is insured for $400,000, your other structures coverage maxes out at $40,000.
Most insurance companies allow you to increase your other structures coverage limit for an additional fee. To nail down if you need more coverage than your policy allows, calculate the rebuild cost of all of your structures.
Personal property coverage pays for your belongings — like your furniture, electronics, and wardrobe — if they’re damaged by a covered peril.
Personal property coverage is usually set at around 50% to 70% of your dwelling coverage amount. If your home is insured for $400,000, your personal property coverage limit will be anywhere from $200,000 to $280,000.
Here are a few tips to ensure you have enough personal property coverage:
Take a home inventory. This is a detailed list of all of your personal possessions. It gives you a better idea of how much personal property coverage you need. And bonus: You’ll have records of your belongings if you need to file a claim.
Decide if actual cash value coverage is enough. Standard home insurance policies protect your personal property at its actual cash value (ACV) — this means depreciation is subtracted from the total reimbursement amount. If you don’t have enough in your savings to cover the cost of depreciation, consider upgrading your coverage to replacement cost coverage. This type of coverage fully protects your belongings so you’re paid enough to replace them with new ones. While replacement cost coverage typically costs 10% more than standard personal property coverage, it can be worth it.
Add extra coverage for high-value belongings. Home insurance companies set restrictions on how much they’ll reimburse you for high-value items like jewelry or computers. That means if your engagement ring is stolen, you’ll only be reimbursed a specific amount. If you have expensive belongings, check with your insurance company to see if they offer a scheduled personal property endorsement to increase your coverage limits for specific items.
If someone is badly injured at your house and you’re held liable, personal liability coverage pays for legal fees, medical bills, funeral expenses, and any settlement amount you have to pay out.
Standard homeowners insurance typically offers up to $500,000 maximum in personal liability coverage, but this might not be enough.
To figure out how much coverage you actually need, you’ll need to add up all of your assets, including your:
Home and belongings
Cars and boats
Savings and investments
Retirement funds and pensions
So if you have $400,000 in assets, you should have at least $400,000 in personal liability coverage — if not more to ensure you’re fully protected.
Have more than $500,000 in assets? Consider an umbrella policy
If your assets total more than the maximum personal liability coverage limit in your policy — typically $500,000 — consider adding a personal umbrella policy. With umbrella insurance, you can usually increase your liability insurance between $1 million and $5 million.
Medical payments to others coverage pays for medical bills for your guests if they’re injured while at your home — regardless of who’s at fault. Typical home insurance policies come with $5,000 in coverage, though you might be able to increase it to $10,000 or even $25,000 depending on the company.
You might want to increase your medical payments to others coverage limits if you have a pool, trampoline, or a dog that puts your guests at greater risk of getting hurt in an accident.
Additional living expenses (ALE) — also called loss of use coverage — is the part of home insurance that pays for you to live somewhere else if your home is being repaired or rebuilt after a covered disaster. It can help pay for things like:
A standard home insurance policy sets ALE coverage at 20% of your dwelling coverage, but some insurers will let you choose higher coverage limits for an additional cost. If your home is located in an area that’s prone to natural disasters, it may be worth it.
You can calculate how much ALE coverage you need by adding up how much you spend on living expenses like food, rent, and gas in a typical month.
Homeowners insurance doesn’t cover everything — you may need to add additional coverages to your policy or purchase separate standalone policies to ensure you’re fully protected. These might include:
While homeowners insurance covers certain types of water damage — like a burst pipe — it doesn’t cover flood damage. If you live in an area that’s at high risk for flooding, you should consider purchasing a standalone flood insurance policy. Homeowners who live in flood zones may also be required by their mortgage lender to have a flood insurance policy in addition to their regular home insurance.
Your standard home insurance policy also won’t cover earthquake damage. You may be able to add an earthquake endorsement to your current homeowners insurance policy. Otherwise, you might want to consider purchasing a standalone earthquake insurance policy — something that might be wise if you live in an area of California where earthquakes are common.
Damage from water that backs up through your drains or overflows from a sump pump isn’t typically covered by a regular homeowners insurance policy. If you want protection from this type of water damage, you can add water backup coverage as an endorsement to your policy.
Home insurance in the U.S. costs around $105 a month or $1,249 a year on average. But insurance premiums vary greatly depending on where you live, the size of your home, and other factors. The best way to find out what you’ll pay for coverage is to get quotes from different insurance companies — which you can do right here at Policygenius.
Maybe — since inflation causes construction costs to rise each year, it’s not a bad idea to adjust your home insurance coverage levels to account for this. You’ll also want to add more coverage to your home if you made major renovations, added a new structure to your property, or purchased lots of expensive belongings to ensure you’re fully protected.
Your home’s market value is the price it would sell for on the real estate market. Its replacement cost value is how much insurers estimate it would cost to rebuild your home from the ground up using the same or similar building materials as prior to the loss. Your dwelling coverage is based on your home’s replacement cost value — not its market value.
Home insurance covers foundation repair if the damage was caused by a peril that’s covered in your policy, like a fallen tree or explosion. But home insurance doesn’t cover flood or earthquake damage to your foundation. It also won’t cover any gradual damage, like if your foundation cracks over time due to normal wear and tear.
Most mortgage lenders require you to have enough coverage to rebuild your home completely from the ground up after a covered loss. This is to protect the lender's financial investment in your home should the unthinkable happen and it’s destroyed. Mortgage lenders typically require your coverage to include protection against hazards like fire, wind, hail, and vandalism. And if you live in a high-risk flood zone, your lender will likely require you to take out flood insurance as well.
Yes, you might want to take out builders risk insurance if you're renovating your home. This is because standard home insurance policies don't cover homes under construction. Most insurance carriers allow you to add builders risk insurance as an endorsement to your existing policy, helping you to avoid the hassle of taking out a separate policy with a different insurer.
Answer a few questions about yourself and your home, and we’ll crunch the numbers to estimate your home insurance coverage needs and potential rates.
A home warranty is a service contract that helps cover the cost of broken home appliances or systems, like your refrigerator, washer and dryer, and HVAC system, but warranties are limited in terms of what’s covered and may not be worth the cost.