How Much Homeowners Insurance Do I Need?

The many components of homeowners insurance can be a lot to handle. Let’s take a look at what’s important and how much you need.

Your homeowners policy should insure enough to replace your belongings sufficiently if they’re stolen, protect you from lawsuits stemming from accidents or injuries on your property, and, of course, rebuild or repair your home if something happens.

You should have a rough estimate of how much your house is worth. A few parts of your policy, like other structures and loss of use coverage, can be derived from a percentage of your home’s value. Other aspects of your homeowners insurance, like your personal property and liability coverage, have some common fixed amounts, but you may want to change them based on your situation.

The purpose of homeowners insurance is to safeguard your property. There are a lot of things out of your control — from theft to weather to freak accidents — that can affect your family or house. Insurance is the best way to protect against these things.

So if something was to happen to your home, you’d want enough homeowners insurance to completely cover all of your assets beyond just the physical structure of your house.

You’re almost always required to have homeowners insurance to get a mortgage, and a lender may recommend the minimum amount of coverage. You may need more than this to be safe because rebuilding your home after a disaster isn’t the time you want to be left short-changed.

The first piece of your homeowners policy is the part that protects your house. This is called dwelling coverage, and it insures the physical structure of your house. It includes the roof, walls, floor, windows and much more. If any of these things are damaged by a covered peril, your provider will pay for a rebuild or repairs.

The amount of dwelling coverage you have should serve as an adequate safety net in case of disaster. For example, let’s say your house is worth about $300,000. If it gets burned down by a wildfire, you’ll want at least $300,000, if not a little more, so your house can be returned to how it was before without changing your standard of living.

You’re responsible for paying whatever rebuild costs are remaining if your policy doesn’t cover all of it, which is why it’s better to be on the safe side. How you achieve sufficient coverage can differ based on which type of dwelling coverage you choose. While each option will protect your home from the covered perils, how they cover you financially isn’t the same.

If you opt for replacement cost coverage, your policy will reimburse you for the “replacement cost” of your house. Replacement cost is determined by how much it would take to rebuild your home in a similar fashion if it was damaged or destroyed. It calculates the cost of materials and labor needed that would get your house back to the way it was. 

It’s important to note, though, that replacement cost does not factor in the land your house is sitting on, and it may not equal how much you paid for it.

For example, you may have bought your house for $300,000, but the replacement cost, which is just the cost of the materials and labor, could be less. This is because the price of a house is determined by a lot more than just its physical characteristics.

The desirability of location, the neighborhood, and the real estate market as a whole can cause a house to be more expensive than the sum of its parts. Replacement cost is based only on raw materials and construction costs, which are much more stable and easier to estimate.

Market value coverage, on the other hand, takes into account the things that are going on outside of your house to determine what your home is worth. Market value coverage looks at what a buyer would pay for a house similar to yours.

Factors that affect this include the real estate market, your neighborhood, distance to schools and parks, and local crime rates. It considers the reasons why someone would want your house beyond the physical structure.

This type of valuation could be beneficial if your house goes up in value from when you bought it, but it could leave you short-handed if your home goes down in value. 

While market value coverage is usually cheaper, most people opt for replacement cost due to the enhanced coverage. Many policyholders see replacement cost coverage as safer since it doesn’t rely on nearly as many outside factors. 

To protect things on your property other than your house, the other structures coverage portion of a homeowners policy is there. Other structures coverage insures features of your property not connected to your house, like fences, sheds, gazebos, or a detached garage. 

If one of these buildings is damaged by a covered peril, you’re insured for it thanks to your other structures coverage. The amount of coverage you have is usually based on a percentage of your dwelling coverage, which is commonly 10%. 

So if you have $300,000 of dwelling coverage, you’ll likely have $30,000 in other structures coverage. Like with dwelling coverage, if you don’t have enough other structures coverage to completely pay for the repairs, you’ll have to pay the rest out of pocket.

Personal property coverage is your financial safeguard for your belongings in case they’re stolen or damaged. This can include your furniture, appliances, computer, clothes, some jewelry and more. You have the option of replacement cost or actual cash value coverage for your personal property.

While the term is the same as in dwelling coverage, it works a little differently for your personal property. It’s more straightforward. Replacement cost coverage for your personal property means if something you own was damaged by a covered peril, your insurance will reimburse you exactly what you paid for it up to your policy’s limit.

For example, if your couch that you paid $1,000 for three years ago was stolen, you’d be reimbursed $1,000 to get a new one under replacement cost coverage.

Actual cash value coverage is the other, usually cheaper, form of personal property coverage. It differs in one major way: it factors in depreciation. So you’ll be paid less for your items under actual cash value coverage.

For example, if your couch that you paid $1,000 for three years ago was stolen and you have actual cash value coverage, your provider will reimburse you for what they believe the couch was worth at the time it was stolen, which will be less than $1,000. Since the couch is now three years old, it lost value from the original time it was purchased.

Make sure your provider knows if you have any valuable or rare items, like antiques, art or especially expensive jewelry. The insurance company may suggest getting extra coverage for these that your standard policy may not cover.

Another aspect when considering how much homeowners insurance you need is your loss of use or additional living expenses (ALE) coverage. If your home gets damaged or destroyed by a covered peril and is unlivable, your ALE coverage will look to cover the expenses you’ll incur during your temporary move.

Loss of use may cover a hotel stay, short-term rental elsewhere, and some additional living expenses like food and gas while you wait for your home to be repaired. Most homeowners policies calculate your loss of use coverage as a percentage of your dwelling coverage, usually about 20%. 

So if you have $300,000 in dwelling coverage, you’ll have $60,000 in ALE coverage. This means you’ll be reimbursed up to $60,000 in covered costs while you wait for your home to be rebuilt or repaired.

Put simply, personal liability coverage safeguards you if someone tries to sue you because of something that happened on your property. It also pays for the medical bills of that person if you’re deemed liable for the accident.

This could include if someone slips and falls on your steps or if your dog bites them. It’s always included as a part of homeowners insurance.

A typical amount of liability coverage is $100,000, and that amount applies to each claim that’s filed. So if someone sues you after they fall off your dock and you’re deemed liable, you’re covered up to $100,000 to pay for medical bills and legal expenses. Then, if someone else sues you a year later because your dog bit them, you’re again covered up to $100,000 for that incident.

You may want more coverage than this, though, because the injured party can go after your assets in a lawsuit. If you’ve caused immense damages that go beyond your coverage and you don’t have the cash to pay the rest, your car or property could be in danger of being used as collateral.

So it may be wise to go beyond the minimum amount of liability coverage if you regularly host others or if people have a greater likelihood to sue you. For those instances, we recommend getting at least $500,000 in liability coverage and potentially investing in umbrella insurance.

There’s no simple answer, since homeowners insurance costs vary greatly by state and depend on many factors, like the coverage amounts and deductible you want, the age of your home, your proximity to places prone to natural disasters and more.

If you look online, you’ll find lots of different numbers for the average cost of a homeowners policy in the United States. While there’s not an exact number, homeowners insurance on a $250,000 home can cost you anywhere from $1,000 to $6,000 per year, depending heavily on which state you reside and the deductible and coverage options you choose.

As it stands, Oklahoma, Kansas, Florida and Arkansas average the highest annual homeowners premiums due to their increased likelihood of a tornado or hurricane. People in these states could pay exponentially more for premiums every year for standard coverage.

It’s important to remember that a homeowners policy doesn’t protect you from every disaster. Earthquakes and floods, for example, aren’t included and you’ll want to seek separate policies for these.