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How Much Homeowners Insurance Do I Need?

Your home is one of the most essential assets that you'll own in your lifetime. Like many Americans, you may buy a standard homeowners insurance policy to protect your investment in case an unexpected disaster occurs. But just how much homeowners insurance do you need to buy?

A reliable homeowners policy will include dwelling coverage to limits that would help you rebuild your home in case it's destroyed by a covered peril. You'll also need personal property cover, loss-of-use coverage (also called "additional living expenses) in case your home becomes uninhabitable. The liability portion of your coverage will protect you in case someone is hurt on your property or if someone sues you. There are optional coverages that are important to consider as well. We'll cover all these topics below.

In this article, you'll learn how to select the right amount of home insurance to fit your needs.

What Perils Does Homeowners Insurance Cover?

Your insurance policy covers your home against the following named perils, which include:

  • Windstorms
  • Damages from aircraft, cars, and vehicles
  • Explosions
  • Falling objects
  • Fire and smoke
  • Hail and lightning strikes
  • Riots or civil commotion
  • Theft
  • Vandalism and malicious mischief
  • Volcanic eruptions
  • Water damage (from inside your home only)
  • Weight of ice, sleet and snow

How Much Dwelling Coverage Do I Need?

Insurance companies define a dwelling as the structure of your home and often extend the coverage to detached structures unless excluded. On standard homeowners policies, dwelling coverage pays to repair or replace if your home is destroyed by a covered incident. These include fires, windstorms and vandalism.

You should have dwelling coverage that’s equal to your home’s replacement cost.

You should have dwelling coverage that's equal to your home's replacement cost. The figure is not your home's market price. Instead, base your dwelling coverage on your estimated rebuilding costs, which will vary depending on the location of your home and other factors.

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How To Calculate Your Home's Rebuild Costs

Several factors may affect the rebuild cost for your home. According to the Insurance Information Institute, they include two things:

  • Local construction costs
  • The square footage of the structure

To get a quick homeowners insurance coverage estimate, you'll need to multiply the total square footage of your home by local, per-square-foot building costs.

You shouldn't factor your land into your rebuilding costs. To learn about construction costs in your area, contact a local builders association, real estate agent or insurance professional.

Other details that can affect your rebuild cost include the following features:

  • Your home's exterior wall construction (such as masonry, frames and veneers)
  • Your home's style, for instance, colonial versus adobe
  • The number of bathrooms and rooms in your home
  • Your roofing materials
  • Your home's special features, including exterior trim, fireplaces, arched windows
  • Parts of your home with custom features
  • Features you've added to improve your home and add value, such as a second bathroom or kitchen renovations

Consider Your Area's Building Codes When Buying Dwelling Coverage

Local governments periodically change their building codes. These regulations may have changed since construction crews built your home. For instance, your government may require you to rebuild your home according to your state's codes if your home was damaged or destroyed by a natural disaster.

If you believe that parts of your home aren't up to current building codes, ask for an endorsement on your homeowners insurance coverage called an Ordinance or Law. It pays an amount to bring your home up to code during a covered repair.

What if I Own an Older Home with Hard-to-Replace Features?

Some homes have unique features that are expensive to replicate, like intricate ceilings, artistic carvings, and architectural features. Some insurers will not replace these elements with a replacement cost policy, because they are costly and difficult to repair or replace, but others do.

When you own an older home with exquisite features, you may have a modified replacement cost policy. This coverage will use standard building materials and construction techniques used today to repair or replace your damaged home, which may not restore your home to its original details.

How Much Personal Property Coverage Do I Need?

Your personal property coverage protects your belongings. These include items such as your clothing, furniture, computers, electronics and stereo equipment. You should have enough personal property coverage to replace all of your belongings if a total loss event occurs.

Insurance carriers advise homeowners to purchase personal property coverage that's 50 to 70 percent of your dwelling coverage amount. For instance, if you insure your home for $500,000, your personal property coverage will cost anywhere from $250,000 to $350,000.

There are several things that you should consider when purchasing personal property coverage for your home:

  • First, make an inventory of your personal belongings. Use a spreadsheet or paper to draft an inventory of all of the items in your home.
  • Consider upgrading your personal property coverage. Most policies insure your belongings using actual cash value (ACV). It means the insurer considers the depreciated value of your property, then subtracts it from the reimbursement amount you'll receive. Instead, upgrade to replacement cost coverage, which usually costs 10 percent more than ACV.
  • Add extra coverage for high-value belongings. Get more coverage if you own high-value items such as jewelry or computers.

How Much Additional Living Expenses Coverage Do You Need?

Additional living expenses is coverage provided under your home insurance policy that helps pay the costs of temporarily living in another location when your home is uninhabitable.

Under your insurance policy, additional living expenses (ALE) coverage is a fixed percentage of your total dwelling coverage. This coverage pays for living expenses when a homeowner has to temporarily relocate due to a covered peril.

For instance, if your home's roof was destroyed during a windstorm, you may have to live in a hotel until construction crews finish your repairs. ALE coverage would pay for the following expenses:

  • Meals
  • Hotel or rental fees
  • Relocation costs
  • Fuel for traveling

ALE coverage varies depending on your insurer. It is usually 20-30 percent coverage of your dwelling policy.

For example, if your dwelling insurance has a $700,000 coverage limit, your ALE would amount to $210,000 (30 percent, as an example). Under condo insurance policies, some insurers allow up to 50 percent of a resident's dwelling coverage limit.

How Much Liability Coverage Do I Need?

Your homeowners insurance has personal liability coverage that protects you against lawsuits for bodily injuries and bodily damage. It protects your savings account, home, vehicle, and other assets against possible litigation. You should purchase as much liability coverage as you can afford.

You should purchase as much liability coverage as you can afford.

For instance, what if your dog bites the ankle of a plumber working in your kitchen? Your personal liability coverage will protect you against medical costs and other pain and suffering as well as any court costs and damages awarded to the injured person.

You should have enough liability coverage to protect all of your assets. According to the III, most insurers offer a minimum of $100,000 in liability coverage. Experts recommend that homeowners purchase liability coverage totaling $300,000 to $500,000. For instance, if you have $300,000 in assets, you should carry at least $300,000 in personal liability coverage.

The five top liability claims that homeowners face include:

  • Home Accidents – It occurs if someone gets injured on your property either through negligence, hazards or accidental means.
  • Dog Bites – Your homeowners insurance won't cover breeds that they consider high-risk. Speak with your local insurance agent if you own a breed they may consider aggressive, such as an Akita, Pitbull, German Shepherd or other breeds.
  • Falling Trees – If a tree on your property falls onto another person's car or vehicle, you may be liable for the damages
  • Intoxicated Guests – You may be liable if a person on your property becomes intoxicated and causes damages or injuries to another person.
  • Injured Domestic Workers – You could face a lawsuit if you hire a person to take care of your home and they get injured while working.

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Umbrella or Excess Liability Policies

Umbrella policies offer increased liability limits beyond your home insurance's coverage. They reimburse you after you've met your liability limit on your homeowners insurance policy and provide broader coverage than what standard policies offer.

The cost for your umbrella or excess liability insurance premium will depend on similar factors that determined your homeowners insurance rate.

Other Coverages To Consider

Most homeowners insurance policies exclude flood and earthquake damage.

Most homeowners insurance policies exclude flood and earthquake damage from their policies. You'll have to purchase additional coverage to protect your home from these disasters:

Flood Insurance

Floods are the most common natural disaster in the United States, accounting to almost 90 percent of natural disasters. and flood insurance is sold as a separate policy. Consider buying coverage from the Federal Emergency Management Administration for your home if your area frequently experiences these events.

Standard homeowners insurance policies don't cover damages from flooding but they will cover some types of water damage from sudden or accidental causes. These include burst pipes that cause damage to your furniture and other belongings. According to FEMA, one inch of floodwater can cause $25,000 in cleanup and home repairs.

Earthquake Insurance

Standard homeowners insurance companies may give you the option to add earthquake coverage to your policy for additional fees. You may add it as an endorsement or purchase a standalone earthquake policy.

You should consider this coverage, especially if you live in an area susceptible to these disasters, such as Oklahoma, California, Nevada and other affected states along the west coast. These disasters have the potential to cause catastrophic damage to a home's foundation.

Allstate, Nationwide and Safeco offer this coverage to California residents through the California Earthquake Authority. Palomar and GeoVera also sell these policies.

Sewer Line Replacement

Another thing standard homeowners insurance policies may not cover are backups from sewers and drains. Additionally, coverage doesn't protect against overflow from sump pumps. You can get about $10,000 worth of sewer line coverage for as a little as $30 a year or as high as $10 month.

Buy Adequate Homeowners Insurance To Protect Your Home and Assets

When shopping for a home insurance policy, it's essential that you purchase enough to protect your home and assets if a total loss occurs. Your dwelling coverage should equal your home's current replacement costs, including materials and construction, instead of its market value.

Purchase enough personal property insurance to replace all of your belongings. If possible, upgrade this coverage to replacement cost coverage instead of actual cash value, so you can purchase new things at today's prices. Finally, buy as much liability coverage as you can afford to protect yourself and consider umbrella insurance if you have many assets to cover.

Do you need an affordable homeowners policy that protects you in case the worst happens? SmartFinancial has tools that simplify the shopping process for homeowners insurance. Compare coverages and rates from local insurance companies in your area for free by entering your zip code below.

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