How much homeowners insurance do I need?

You should have as much homeowners insurance as you can reasonably afford. Your homeowners policy can keep you and your assets protected in a number of different situations. As such, it’s important to know your coverage limits so you aren’t caught off guard.

In the following guide, we review common coverage types and situations in which you may need to increase coverage.

How much home insurance coverage do you need? — table of contents:

• What coverage options are available?
• How much dwelling coverage do I need? 
• How much personal property coverage do I need?
• How much personal liability coverage do I need?
• Additional homeowners insurance coverages
• Actual cash value vs. replacement cost value
• Homeowners insurance endorsements
• How to choose the right home insurance coverage

What homeowners coverage options are available?

In some cases, the type of home you own helps to determine the best type of coverage for you. Most homeowners insurance companies offer different tiers of coverage.

These are broken down as follows:

• HO-1 (basic form): The most basic form that only covers against ten named perils.
• HO-2 (broad form): This named peril policy is only slightly more robust than an HO-1.
• HO-3 (special form): The most common policy, this covers your dwelling on an open peril basis.
• HO-5 (comprehensive form): The most robust form, this covers your dwelling and personal belongings on an open peril basis.
• HO-8 (modified form): A policy for architecturally significant or older homes that may be more difficult to insure.

COMMON HOME INSURANCE COVERAGE LIMITS

Find below a table showing the average limits found on most homeowners policies:

How much dwelling coverage do I need? 

This part of your homeowners insurance covers your primary dwelling and will pay to repair or rebuild the structure of your home and any attached buildings. Most home insurance companies require you to carry coverage that is at least 80% of the dwelling’s replacement value, otherwise, they won’t fully cover the damage.

If your house costs $150,000 to replace, you would need to carry insurance in the amount of at least $120,000 in order to be fully covered. Verify this with your insurance company, as some insurers require insurance at 100% of a home's replacement cost. Remember that replacement value is not the same as market value, which incorporates the value of the land itself, as well as other factors.

How much personal property coverage do I need?

Your personal property coverage is what protects your personal belongings. The coverage limits are often a percentage of your dwelling coverage, usually around 50%. This means that a home insurance policy with $300,000 in dwelling coverage would provide somewhere in the neighborhood of $150,000 in personal property coverage.

For items that are particularly valuable — such as fine art or expensive jewelry — limits are often quite restrictive. For such items, you may also want to consider a scheduled property endorsement. This allows you to increase the limits of your coverage so that they reflect the higher value of rare or collectible items.

Keep in mind that some items that you may assume to be covered may not be. Many of the systems in your home, for instance, are oftentimes not covered. HVAC units and hot water heaters are two common home features that may not be covered. As these items can be very costly to replace, you may want to consider an equipment breakdown coverage endorsement.

Ultimately, compiling a home inventory and speaking to your insurance agent about which items are covered is the best way to get the amount of insurance coverage you need.

How much personal liability coverage do I need?

The amount of personal liability coverage you need depends on your individual situation. Personal liability protects you if you are found responsible for property damage or the bodily injury of another party. As such, some people are innately more at risk than others. For instance, certain professions can be more susceptible to lawsuits. Furthermore, owning an attractive nuisance — such as a swimming pool or a trampoline — can also increase your need for more liability coverage. Most companies will allow you to increase this limit for an additional premium. 

Those who require excess personal liability coverage will want to think about which home insurance company they choose from the outset, as offerings may be quite different from one company to another. For instance, some premier insurance carriers — such as PURE, Chubb, or Cincinnati Insurance Company — provide higher liability insurance coverage as a standard offering, with some extending coverage levels to tens of millions of dollars. 

Umbrella insurance

If you need higher liability coverage limits, you could also consider adding an umbrella policy. An umbrella policy adds extra liability coverage on top of your policy’s standard liability limits. It’s not uncommon for umbrella coverage amounts to be $1 million or more. 

Additional homeowners insurance coverage options

Included in your policy are a number of other coverages. Bear in mind that most of these coverage limits can be dependent on the amount of your dwelling coverage.

• Other structures: This covers buildings on your property not attached to your primary dwelling, such as a tool shed or free-standing garage. Usually 10% of your dwelling limit. 
• Additional living expenses: Usually 20-30% of your dwelling coverage, meaning that a $200,000 home would have somewhere in the neighborhood of $40-$50,000 available. 
• Medical expenses: This coverage pays for injuries that others suffer on your property. It is usually available in amounts between $1,000 and $5,000, though these may be able to be increased for an additional premium.

Actual cash value vs. replacement cost value

When it comes to actually receiving a payout from your insurance company, there are a few commonly available options. Most homeowners policies pay out on a replacement cost basis for your primary dwelling, though your personal belongings or other structures may not be covered at this level. As such, it’s important to know the difference as well as how to find out what type of coverage you have.

If your home policy stipulates actual cash value, you will be paid out based on an item’s depreciated value. This accounts for wear and tear as well as the second-hand value of such items, such as televisions for instance. It’s rare that your primary dwelling would be covered at this level, though HO-1 and HO-2 homeowners policies do provide less coverage than others.

Replacement cost coverage will pay the full cost to repair or replace your home. However, there is another option that can account for circumstances. An extended replacement cost endorsement can add upwards of 10 or even 25% on top of your home’s replacement cost. This is meant to account for a rise in local construction costs or building materials.

Remember that your replacement cost is different from the house’s market value, which can be much higher depending on its location. The property itself isn’t factored in when determining your home’s replacement cost, which is determined primarily by square footage and the types of building materials used, as well as local information.

If you want your home and belongings to be fully covered, insuring them at replacement cost — or even extended replacement cost — is the way to go.

Endorsements to a homeowners policy

Most homeowners insurance companies have a variety of add-on coverage options that can provide further protection in certain circumstances. Along with the scheduled endorsements discussed above, homeowners endorsements are commonly available for an additional premium, including the following:

• Identity theft coverage
• Home business coverage
• Sewer backup coverage
• Home daycare insurance

Additional coverage for natural disasters

While certain natural disasters are typically covered — such as windstorms and even hurricane winds in some cases — most insurance companies put limits on certain perils. Furthermore, you could also face an entirely separate deductible if filing a claim related to a natural disaster. Below are some of the most common perils for which you may need to seek out separate coverage:

• Flood: Flood insurance is almost never offered by standard insurance companies. Most policies can be purchased through the NFIP. 
• Earthquake: Earthquake insurance is available in certain states, though coverage can vary state by state.
• Wildfire: While fire is a covered peril in most cases, wildfires can be treated differently by insurance companies. In states susceptible to wildfire, some companies may exclude them from your coverage. There are often a number of ways to add this coverage. 

Choosing your home insurance coverage

Your home is likely the most expensive single item you will buy. As such, it’s critical to make sure it’s insured. Not only that, but your home insurance provides a number of other coverage types that you’ll need to consider. When looking for a homeowners insurance policy, remember that your policy limits should be high enough to keep you covered in the event of a liability claim, to cover the rebuilding costs of your home, or to fully cover the cost of your valuable items.

Ultimately, the amount of coverage that you choose should reflect your needs as well as the potential hazards of where you live. If you are concerned about the cost of fully insuring your home and your valuables, it may be time to compare policies.

The Zebra can help you get free insurance quotes so that you can compare rates and coverage options side-by-side. Enter your ZIP below to get started.