A Homeowners Guide to Coverage Levels and Limits
Updated June 4, 2021
Reading time: 7 minutes
Your home is likely the biggest purchase you’ll make in your lifetime. With such a large investment, you’ll want to take steps to protect it against risk. Homeowners insurance is an important form of financial protection. However, many homeowners wonder, “How much home insurance do I need?”
If disaster strikes, you want enough coverage to rebuild your home, replace your belongings, cover costs if you can’t live in your home, and provide liability protection for your financial assets. However, nearly three out of five American homeowners are underinsured by an average of about 20 percent.
If your policy isn’t enough to cover property damage costs, you could be responsible for paying a large part of the repair and construction costs. Keep reading to learn how much home insurance you need.
Once you have the amount of coverage in mind, use Insurify to compare prices. You’ll get free insurance quotes from half a dozen or more companies, and it only takes a few minutes from start to finish.
To find out how much home insurance you need, consider the three crucial areas that make up your total policy coverage:
Cost to rebuild the home
Value of personal items in the home
Total of your combined assets
These three areas will make up your policy’s dwelling coverage, personal property coverage, and personal liability coverage.
To start, consider the value of your home, belongings, and total assets. Many homeowners will also want to add an endorsement or rider to their policy for extra protection.
Additional coverage can be a good choice if you live in an area prone to natural disasters, have several high-value assets, or own expensive jewelry or antiques.
Many homeowners mistakenly insure their homes according to the home’s value. But market value can fall short of the total cost to rebuild your home.
If there’s a wildfire, a windstorm, or another disaster, the cost to rebuild can be significantly higher than the value of the home. You could end up paying out of pocket to make up the difference.
Two significant factors that impact your home’s rebuilding cost are local construction costs and the home’s square footage. According to the Insurance Information Institute, other details can also have a big impact on the price:
Exterior wall construction: Frame, veneer, or brick or stone masonry
Roof: Type of roof and roofing materials
Construction style: For example, ranch vs. colonial construction
Number of rooms: Bathrooms, bedrooms, and other rooms
Special features: Fireplace, arched windows, or custom-built design
Other structures: Such as a garage, shed, or pool
Your insurer will recommend a dwelling coverage limit, which includes your home’s physical structure and attached structures, such as an attached garage.
You can double-check the coverage limit by multiplying your home’s square footage by the average building cost per square foot in your local area. To find out the average square-foot cost, contact a local contractor.
Keep in mind that this DIY method provides a very rough estimate and may not accurately assess the amount of dwelling coverage you might need.
While most standard homeowners insurance policies offer essential protection, opting for additional coverage can give you peace of mind.
For instance, the cost to rebuild your home can vary over time. Building codes can change, and construction and material costs can rise. If that happens, you may not have enough insurance to cover the total rebuild cost if it’s been a while since you purchased your policy.
You should also consider the type of replacement cost value in your policy. Standard homeowners insurance policies generally include replacement cost value (RCV), which limits your payout to a certain amount.
If you opt for guaranteed or extended replacement cost, your coverage amount will be higher than your policy limit. Having extended coverage can pay higher limits and reduce the amount you’ll be responsible for.
Most homeowners insurance includes replacement cost coverage, which insures the home at its replacement cost value (RCV). Your dwelling coverage amount under RCV will pay today’s prices to replace or repair your home with the same or similar materials.
But what if a shortage of material or workers causes a sudden spike in building or construction costs? The RCV limit in your policy may not be enough to cover the total price to replace your home.
On the other hand, extended replacement cost can increase your coverage limit by 20 percent or more, depending on your insurance company. It’s an upgrade you can add to your insurance policy with an endorsement. Because it extends your dwelling coverage above your policy limits, you may pay a little more for your policy premium. But the difference could more than pay for itself if a wildfire or disaster sweeps through your area.
You’ve likely seen the effects of inflation on the price of consumer goods; the cost of a gallon of milk or a pair of jeans is higher than it was 10 or 20 years ago. Inflation also impacts your home’s dwelling coverage.
With inflation guard coverage, your dwelling limit automatically adjusts when you renew your policy to factor in inflation.
Rather than take a chance of having to pay the difference out of your pocket, ask your insurance company about adding inflation guard to your policy. Your insurer may include it or offer it as a separate policy.
Ordinances, laws, and building codes can change over the years. If you own an older home, you might encounter new guidelines that didn’t exist when the house was originally built, and the changes can increase the cost to rebuild your home.
Ordinance or law coverage is an optional endorsement for your homeowners insurance policy. It covers the additional expense of rebuilding your home to comply with current ordinances, laws, and building codes.
Your homeowners policy includes coverage for your personal items. Standard policies will pay to replace your furniture, clothes, sporting equipment, and other personal belongings if they’re stolen or damaged by a disaster that’s covered by your insurance.
Your policy generally covers your belongings at 50 to 70 percent of your dwelling coverage. For example, the policy limit for your personal possessions would be $110,000 to $154,000 for a home that’s insured for $220,000.
The limit may be the right amount, but it depends on what you own. The best way to find out if you have enough insurance for your items is to create a home inventory.
It can seem daunting to list everything you own on paper, but technology can ease the burden. The Insurance Information Institute suggests taking pictures, recording a video while describing the items, or using a home inventory app.
Pay special attention to the more expensive items you might own, such as jewelry, furs, fine art, or collectibles. Standard homeowners policies generally include those types of things but can limit the amount of coverage. Your insurer can offer additional protection as a personal property rider to insure your items to their full value.
If someone is hurt or injured in your home, personal liability coverage protects you if they decide to sue you. It also pays for damage you, your family members, and your pets may cause other people. How much coverage do you think you’ll need if that happens?
Standard liability limits are around $100,000. In a lawsuit, the injured party can go after all of your assets. Depending on the value of your assets, you may want to talk to your insurance agent about purchasing additional liability protection.
Another name for additional living expenses (ALE) coverage is “loss of use.” It covers the additional expenses you incur if you must live away from your home due to damage or a mandatory evacuation.
For instance, if a fire damages your home and you’re unable to live there for two months while it’s being repaired, ALE coverage can pay for:
Standard homeowners insurance covers ALE but can cap coverage at about 20 percent of your home’s insured value.
The standard amount might not be enough if you live in an area with a high cost of living. It can vary from policy to policy, so check with your insurer to find out what yours covers and how to purchase additional insurance if you need it.
Standard coverage might not be enough if you live in an area prone to flooding, earthquakes, or wildfires. In that case, think about purchasing catastrophe insurance, such as earthquake or flood insurance.
You may also have the option to purchase policy endorsements to increase your policy limits, such as extended replacement cost, ordinance or law coverage, or additional coverage for your more expensive items.
An umbrella insurance policy is another consideration that provides liability insurance. It can bundle with your homeowners policy to increase your liability coverage up to $1 million or more.
The best part is it isn’t as expensive as you might think. For a $1 million personal umbrella policy, the Insurance Information Institute estimates you’ll pay about $150 to $300 per year.
The amount of insurance you need depends on the type of home you own, its location, property features, your personal possessions, the policy deductible, and many other factors. For a quick estimate, the Insurance Information Institute recommends you multiply your home’s total square footage by the per-square-foot building cost in your local area. You can contact a local insurance agent, contractor, or real estate agent to ask about local construction costs. Your insurance agent can also use your home’s size, the number of bedrooms and bathrooms, and other home features to estimate the amount of insurance you need.
Your insurance company may allow you to rent out your home for a short time without additional coverage. Some require you to purchase a policy endorsement to cover the additional liability. To rent or lease your home for a longer-term, you may need to buy a landlord or rental dwelling policy. You could pay about 25 percent more for a landlord policy than what you’d pay for typical homeowners insurance.
Standard homeowners insurance policies don’t cover condo owners. When you own a condo, you own a small portion of the entire building. You need condo insurance to protect the parts of the building you own from perils, such as loss or theft from burglary and smoke or water damage that ruins your walls, floors, or ceilings. Condo insurance can also provide personal liability protection if someone injures or hurts themselves in your home.
Most landlords will have insurance on the structure of the home. However, it doesn’t cover your belongings. That’s where renters insurance comes in. To find out how much renters insurance you need, consider the value of your personal property. Create a home inventory and add up the cost of your items; chances are the amount will be more than you think.
Amy is a personal finance and technology writer. With a background in the legal field and a bachelor's degree from Ferris State University, she has a talent for transforming complex topics into content that’s easy to understand. Connect with Amy on LinkedIn.Learn More