How Much Homeowners Insurance Do I Need?

You may be wondering how much homeowners insurance you really need if you own a home. After all, the more coverage you have, the higher your premiums will be—and you probably don't want to pay more than you have to. Still, if you don't have enough coverage, will you be able to rebuild your house and replace your belongings if a disaster strikes?

The good news is that you can tailor your homeowners insurance policy to ensure you have the right type and amount of coverage.

What Is Homeowners Insurance?

A home is most likely the most expensive single purchase you will ever make, so it stands to reason that you would want to protect that investment. One way to do so is to keep up with the inevitable repairs and maintenance that keep your home in good shape. Another option is to purchase a good homeowner's insurance policy.

Homeowners insurance is a type of property insurance that protects your home and other valuable possessions. A standard policy protects your home and personal belongings from damage and loss. It also safeguards your assets against liability claims such as personal injuries and pet-related incidents.

Homeowners Insurance Coverage

Each insurance policy covers specific "perils"—the mishaps against which you are protected. The following are some of the most common perils covered by standard homeowners policies, according to the Insurance Information Institute:

  • 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 a wide range of perils, they do not cover everything, such as:

  • Floods. Flood insurance is expressly excluded from standard policies, so you must purchase it separately. Even if you don't live in a flood zone, you should think about flood insurance: Flooding is involved in 90% of natural disasters in the United States.
  • Earthquakes. Earthquake insurance is typically available as a standalone policy or as an endorsement to your existing homeowner's policy.
  • Maintenance Damage. Mold, termite and other pest infestations, and damage caused by a lack of maintenance are not covered by homeowner's insurance.
  • Sewer Backup. Standard policies and flood insurance do not cover sewer backups. Typically, coverage is available as a separate policy or as an endorsement.

How Much Homeowners Insurance Do I Need?

If you have a mortgage, your lender will require a certain amount of dwelling and liability coverage, according to Insurance.com. This coverage safeguards your investment as well as the lender's.

In contrast, if you do not have a mortgage, you are not required to purchase homeowners insurance. Of course, while coverage is technically optional, it would be extremely risky to leave your most valuable asset unprotected. Instead, a good rule of thumb is to have enough homeowner's insurance to cover the following:

  • 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 provide four types of coverage to assist you in meeting these objectives: dwelling coverage, personal property coverage, liability coverage, and additional living expenses coverage.

Dwelling Coverage

Recommended coverage: equal to your home’s replacement cost

Dwelling coverage is a component of your homeowners insurance policy that assists in the rebuilding or repair of your home and any attached structures (such as a garage, deck, or front porch) if they are damaged by a covered peril.

Ideally, your dwelling coverage should equal the replacement cost of your home. This should be based on rebuilding costs, not the value of your home. Depending on where you live, the condition of your home, and other factors, the cost of rebuilding may be higher or lower than the original price.

You can calculate rebuilding costs with the help of your insurance agent or an appraiser. You can also estimate the cost by multiplying your home's square footage by the local building cost per square foot for your type of house. For example, if your home is 2,000 square feet and local building costs are $100 per square foot, it would cost approximately $200,000 to replace it. A local real estate agent or appraiser should be aware of the average construction costs in your area.

Personal Property Coverage

Recommended coverage: enough to replace all your belongings

Personal property insurance covers everything in your home other than the house itself, including appliances, clothing, furniture, electronics, sports equipment, toys, and even the food in your refrigerator. If your belongings are destroyed, stolen, or vandalized, the coverage kicks in.

In general, you should have enough coverage to replace everything you own. This figure can be difficult to calculate because most people have no idea how much stuff they actually own. Making an inventory of everything you own is a good idea: make a detailed list of what's in each room and take photos of the more expensive items.

If you have valuable or expensive items, such as jewelry, musical instruments, high-end sports equipment, or valuable art, you may require additional coverage. Make a separate inventory of these items, estimate their replacement costs, and ask your insurance agent if you require additional coverage for them.

Liability Coverage

Recommended coverage: As much as you can afford

Liability coverage is a component of your homeowners insurance that kicks in if someone is injured on your property. According to NetQuote, the following are the five most common liability claims that homeowners face:

  • Dog Bites. Some dog breeds are regarded as high risk and are not covered by standard policies. Check with your insurance agent if you have a pit bull, an Akita, a German shepherd, or another potentially dangerous dog breed. Check to see if you are covered if your dog bites someone who is not on your property, such as in a park.
  • Home Accidents. Even if someone comes onto your property uninvited and is injured, you are liable.
  • Falling Trees. If a tree on your property falls and injures someone or damages a car or neighbor's home, you may be held liable.
  • Intoxicated Guests. If one of your guests becomes intoxicated, you may be held liable for any harm that person causes to others or property.
  • Injured Domestic Workers. If you hire someone to clean your house or mow your lawn, you may be held liable if they are injured on the job.

The liability coverage on most homeowners insurance policies is at least $100,000. It's a good idea to increase that to at least $300,000—or more if you can afford it.

You can purchase an umbrella insurance policy if you require liability coverage that extends beyond your homeowners insurance policy. This is especially important if you have a large net worth or a higher-than-average risk of being sued (for whatever reason), work from home, or serve on a board of directors.

Additional Living Expenses (ALE) Coverage

Recommended coverage: 10% to 30% of your dwelling coverage

If your home was destroyed by a fire or a tornado, it could take months or even years to rebuild. In the meantime, where would you live?

Additional living expenses (ALE) coverage is a component of homeowners insurance that functions as an emergency fund if you are temporarily displaced from your home. It covers things like staying in a hotel or the extra costs of eating out when you can't cook at home. ALE coverage may also reimburse you for the costs of doing laundry, renting furniture, storing your belongings, and boarding your pet.

According to Insurance.com, most homeowners insurance policies calculate your ALE as a percentage of your dwelling coverage—typically 20%. If you have a large family (and a lot of mouths to feed), you should choose the higher coverage option if at all possible.

The Bottom Line

Consult with your insurance agent to determine whether you have the proper type and amount of homeowners insurance coverage. It's not always as expensive as you might think to upgrade from a mediocre policy to excellent coverage that will keep you safe (and let you sleep at night).