How Much Homeowners Insurance Do I Need?

How Much Homeowners Insurance Do I Need?

You might be wondering how much homeowners insurance you actually need if you own a property. Since the premiums increase with the amount of coverage you have, you generally want to avoid spending more than is necessary. Even so, if a disaster were to strike, would you be able to afford to rebuild your house and replace your belongings if you didn’t have enough coverage?

Homeowners insurance protects what may be the biggest investment of your life: Your residence. Having sufficient coverage is crucial in case of a disaster like a fire.

But how do you know how much homeowners insurance you need? The key is to walk through each standard coverage in a policy, adjust amounts as needed and then consider extra coverage to plug big holes.

The good news is that your homes insurance policy may be adjusted to ensure you have the appropriate level and kind of coverage.

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.

Read also: How Many Claims are Allowed in Home Insurance

Homeowners Insurance Coverage

Each insurance policy covers certain “perils”—the mishaps you’re protected against. According to the Insurance Information Institute, 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
  • Lightning strikes
  • Riots or civil commotion
  • Theft
  • Vandalism and malicious mischief
  • Volcanic eruptions
  • Water damage (from within the home only)
  • Weight of ice, snow, and sleet
  • Windstorms and hail

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 endorsement to your existing homeowner’s coverage.

Maintenance Damage

Homeowner’s 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 endorsement.

How Much Homeowners Insurance Do I Need?

According to Insurance.com, if you have a mortgage, your lender will require a minimum amount of dwelling and liability coverage. That coverage protects your investment—as well as your lender’s.

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 homeowner’s 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

Dwelling coverage is the part of your homeowners insurance policy that helps pay to rebuild or repair your home and any attached structures—such as a garage, deck, or front porch—if they’re damaged by a covered peril.

Ideally, your dwelling coverage should equal your home’s replacement cost. This should be 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.

Personal Property Coverage

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 for them.

Liability Coverage

Liability coverage is the part of your homeowners policy that kicks in if someone is hurt on your property. According to NetQuote, five common liability claims that homeowners face are:

  • 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, 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.

If you need liability coverage that goes beyond your homeowners insurance policy, you can buy an umbrella insurance policy. This can be an especially good idea 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

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 such as staying in a hotel or the added costs of eating at restaurants when you can’t cook at home. ALE coverage may also reimburse your costs to do laundry, rent furniture, store your household items, and board your pet.

Most homeowners insurance policies calculate your ALE as a percentage of your dwelling coverage—typically 20%—according to Insurance.com. If you have a large family (and a lot of mouths to feed), you should opt for the higher coverage if possible.

Determine how much insurance you need for your possessions

Most homeowners insurance policies provide coverage for your belongings at about 50 to 70 percent of the insurance on your dwelling. However, that standard amount may or may not be enough. To learn if you have enough coverage:

Conduct a home inventory of your personal possessions

In order to accurately assess the value of what you own, it’s highly advisable to conduct a home inventory. A detailed list of your belongings will not only help you figure out how much insurance you need, but it will also serve as a convenient record. In the event any or all of your stuff is stolen or damaged by a disaster an inventory will make filing a claim much easier.

While you’re reviewing your possessions, think about whether you want to insure them for actual cash value (where the policy would pay less money for older items than you paid for them new) or for replacement cost (which would cover to replace the items). The price of replacement cost coverage for homeowners is about 10 percent more but is generally a worthwhile investment in the long run. (Note that flood insurance for belongings is only available on an actual cash value basis.)

If you think you need more coverage, contact your insurance professional and ask about higher limits for your personal possessions.

Take stock of your expensive items

There are limits on how much a standard homeowners insurance policy will cover for items such as jewelry, silverware, collectibles and furs. For example, jewelry coverage may be limited to under $2,000. Some insurance companies may also place a limit on what they will pay for computers.

Check your policy (or ask your insurance professional) for the limits of your coverage for any expensive items. If your home inventory includes items for which the limits are too low, consider buying a special personal property floater or an endorsement. This will allow you to insure valuables individually or as a collection, with significantly higher coverage limits.

Additional Coverage You May Need

Depending on your situation, you may need additional coverage that’s not included in a standard policy. This can usually be done with add-ons and endorsements to your base policy.

Home business coverage: If you run a business out of your home, especially where customers come and go, you likely need business liability and business asset coverage. For example, if a customer is injured in your home office, you would need business liability insurance.

Identity theft: It can be expensive to recover from identity theft or being hacked. Cybercrime and identity theft are common exclusions in a homeowners policy. If your identity is stolen and they take funds out of your bank account, your homeowners insurance policy will not cover the loss.

Identity theft insurance is commonly available from home insurers. It reimburses you for money lost from these problems. For example, Allstate offers an identity theft endorsement that reimburses up to $25,000, for $30 annually (depending on the state).

Cyber insurance. Some home insurance companies sell personal cyber insurance as an add-on to a policy. This covers you for cyberattacks, cyberbullying, cyber extortion, data breach and online fraud.

More Home Insurance Extras

Home insurance companies often offer a wide variety of endorsements to fill other coverage gaps. Depending on the company, you might be able to add on:

  • Increased coverage for landscaping
  • Service line coverage
  • Increased coverage for ordinance or law (when rebuilding triggers the need to comply with a new law, such as new building codes)
  • Inflation guard (keeps dwelling coverage up to date with the costs to rebuild)
  • Bed bug coverage
  • Home day care coverage
  • Home systems breakdown coverage
  • Water backup and sump overflow

Conclusion

Homeowners insurance covers losses and damages to your home and belongings and protects your assets from any liability claims. Standard policies don’t cover everything, so you may need additional coverage to protect against perils such as floods and other natural disasters. Your insurance agent can help you decide the type and amount of coverage you need.

Talk with your insurance agent to find out 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).

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