How Much Dwelling Coverage Do You Need?

The amount of dwelling coverage you need depends on rebuilding costs — not your home’s market value.

Janet Berry-Johnson
Janet Berry-Johnson
  • 8+ years writing about insurance, taxes, and personal finance

  • Certified public accountant

Janet applies her experience in personal finance, taxes, and accounting to make complex financial topics accessible. Her byline has appeared on numerous web media.

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Sarah Archambault
Sarah Archambault
  • Experienced personal finance writer

  • Background working with banks and insurance companies

Sarah enjoys helping people find smarter ways to spend their money. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans.

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Updated June 18, 2024

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Dwelling coverage is part of a standard homeowners policy. It protects the physical structure of your home against damage from perils like fire, windstorms, and vandalism.[1]

Choosing the right dwelling coverage amount ensures you can repair or rebuild your home after a loss. So, how much dwelling coverage do you need? Here’s what you should know about comparing home insurance quotes, as well as some tips to help you find the best insurance coverage at an affordable price.

Quick Facts
  • Your dwelling limit influences the total cost of your homeowners insurance policy.

  • Dwelling coverage typically covers your home’s actual cash value, replacement cost, extended replacement cost, or guaranteed replacement cost.

  • Dwelling coverage usually excludes flooding and earthquakes.

Dwelling coverage explained

Dwelling coverage, also known as Coverage A in a standard homeowners insurance policy, covers the physical structure of your home, including the walls, roof, flooring, and any attached structures, such as a garage or deck. Most home policies also provide other structures coverage (Coverage B) to protect structures that aren’t attached to your home, such as a shed or gazebo.

A peril is a specific risk or reason for loss, such as a fire, windstorm, or flood. Dwelling policies may offer all-perils coverage or named-peril coverage. All-perils policies, also called open-perils policies, cover every peril except for those your policy specifically lists as exclusions. Named-peril policies cover only those perils named in the policy.

If a covered peril damages or destroys your home, dwelling coverage helps pay for the repair or rebuilding costs.[2]

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What dwelling insurance covers

While coverage can vary between insurance products, a standard home insurance policy typically covers damage from the following:

  • Fire and smoke

  • Windstorm and hail

  • Lightning strike

  • Explosions

  • Vandalism and malicious mischief

  • Damage caused by a vehicle or aircraft

  • Falling objects

  • Weight of ice, snow, or sleet

  • Water damage from plumbing, heating, or air conditioning overflow

  • Electrical damage from artificially generated currents

What dwelling insurance doesn’t cover

Homeowners policies also have exclusions, meaning certain losses aren’t covered. Exclusions typically include:

Good to Know

More than 40% of flood insurance claims come from areas that aren’t considered at high risk of flooding, according to the Federal Emergency Management Agency. An inch of water can cause about $25,000 in damage to homes, FEMA says. So it may be worth considering flood insurance even if you’re not in a designated high-risk zone.

How to choose a dwelling coverage amount

The dwelling limit on your home insurance policy should reflect the cost of reconstructing your home from the ground up. It shouldn’t be based on the purchase price or fair market value of your home (which also includes the value of the land and depends on the real estate market).

Ask your insurance agent to help you decide how much coverage you need. The right amount of coverage is usually based on a rate per square foot. Review your coverage periodically since major home improvements, inflation, and other changes in rebuilding costs can affect the amount of dwelling coverage you need.[3]

Insurers have a few different ways of valuing your home, and the method used generally affects your premiums and potential payouts when you file a claim. Here’s a closer look at how insurance companies value your home.

  • illustration card https://a.storyblok.com/f/162273/150x150/b045612c49/house-rental-96x96-orange_045-value.svg

    Actual cash value

    Actual cash value (ACV) coverage pays to repair or replace your home minus depreciation and after your insurance deductible. Depreciation accounts for the age and condition of your home immediately before the loss.

    When you have a claim, the insurance company calculates the payout based on the current value of the materials and labor costs, subtracting depreciation.

    Since ACV deducts depreciation, the payout may be significantly lower than the cost of repairing your home. This can leave you with a gap you’ll need to pay out of pocket. Most home policies don’t use ACV for dwelling coverage.

  • illustration card https://a.storyblok.com/f/162273/150x150/e6c9ee6008/recovery-and-repair-96x96-blue_023-repair.svg

    Replacement cost value

    Replacement cost coverage pays to repair or rebuild your house, up to your policy limit, without deducting for depreciation. This means you get the amount necessary to restore your home to its original condition using similar materials and quality.

    When you file a claim, the insurance company estimates the cost to rebuild and pays that amount, regardless of the age or condition of your home.

    Limits that reflect the replacement value of your home typically provide a higher payout than ACV but also cost more. This is the most common way that policies value homes for dwelling coverage.

  • illustration card https://a.storyblok.com/f/162273/150x150/79b027a857/house-rental-96x96-yellow_050-budget.svg

    Extended replacement cost

    Extended replacement cost coverage goes beyond the standard replacement cost by providing an additional percentage over the dwelling limit if rebuilding costs exceed your policy limits due to inflation or other increases in labor and materials costs.

    These policies typically cover 20%–25% more than your stated dwelling coverage limit. This option ensures you have enough coverage to rebuild even if costs rise unexpectedly.

  • illustration card https://a.storyblok.com/f/162273/x/a0c151e1ba/accidental-tearing-apart-cracking-etc.svg

    Guaranteed replacement cost

    Guaranteed replacement cost coverage requires your insurance company to cover the total cost to rebuild your home, regardless of the policy limits. In the event of a total loss, your insurance company pays whatever amount is necessary to fully rebuild your home, regardless of policy limits. This option comes with the highest premiums but eliminates any risk of having to pay for rebuilding out of pocket.

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How much does dwelling coverage cost?

Dwelling coverage is part of a standard homeowners insurance policy, so it’s not a separate cost. But your annual premium depends partly on the amount of dwelling coverage you choose. Generally, the higher the coverage limit, the higher your premium. You can expect to pay more for coverage on a $300,000 house than you would to insure a $150,000 home.

The table below shows the average annual costs for dwelling coverage at different limits.

Average Annual Premiums by Dwelling Coverage

These figures are nationwide averages, so your premium might vary based on your ZIP code and the age and condition of your home.

What else does a home insurance policy cover?

In addition to dwelling coverage, a standard homeowners insurance policy includes several other coverages.

Liability coverage

Liability coverage protects you if someone is injured on your property or if you, a family member, or a pet causes damage to someone else’s property. It covers legal fees, medical bills, and any settlements or judgments, up to your policy limits.

How much liability coverage to buy

Homeowners liability insurance limits typically start at $100,000, but experts recommend purchasing at least $300,000–$500,000 of liability coverage to ensure you’re well protected against potential lawsuits and large claims.[4]

An umbrella policy can provide extra coverage beyond those limits if needed.

Personal property coverage

Personal property coverage helps pay to repair or replace your personal belongings, such as furniture, electronics, clothing, and appliances, if they’re stolen, damaged, or destroyed by a covered disaster. Coverage typically applies to property damage for belongings in your home, items in your car or away from home while traveling, and the contents of an offsite storage unit.

How much personal property coverage to buy

Personal property coverage is usually set at 50%–70% of your dwelling coverage limit. Doing a home inventory can help you decide if this standard amount is enough or if you need to buy additional coverage for expensive items, like jewelry, silverware, furs, or computers.

Additional living expenses (ALE) coverage

ALE, also known as loss of use coverage, pays for extra costs you incur if you can’t live in your home temporarily after a covered loss.

For example, if a fire destroys your kitchen, ALE covers expenses like hotel bills, restaurant meals, and other costs that exceed your normal living expenses. This ensures you can maintain your standard of living while your home is being repaired.

How much ALE coverage to buy

ALE coverage is usually set at 20% of your dwelling coverage limit, but some insurance companies provide an unlimited dollar amount for a limited time. You may want to ask about purchasing additional coverage if you’re in an area with a high cost of living.

Dwelling coverage amount FAQs

Here’s some additional information about dwelling coverage to help you determine how much homeowners insurance you should buy.

  • What’s the 80/20 rule for home insurance?

    The 80/20 rule means you should insure your home for at least 80% of the home’s replacement cost to receive total coverage on partial losses. If your dwelling coverage limit is less than 80% of the full replacement cost, the insurance company may reduce your claim payout.

  • Is dwelling coverage required?

    While not legally required, your bank or mortgage lenders typically mandate dwelling coverage to protect their financial interest in the property. Even if not required, it’s a good idea for most people, as the coverage ensures they can afford to repair or rebuild after a major loss.

  • What’s the difference between homeowners insurance and dwelling insurance?

    Homeowners insurance is a comprehensive policy covering dwelling, liability, personal property, and additional living expenses. Dwelling insurance is part of your home insurance policy that specifically covers the structure of your home.

  • What are the coverages in a standard homeowners insurance policy?

    A standard homeowners insurance policy includes dwelling coverage, liability coverage, personal property coverage, and additional living expenses coverage.

  • What is extended dwelling coverage?

    Extended dwelling coverage offers additional protection by covering costs that exceed your dwelling coverage limit — usually by an extra 20%–25%. It helps cover unexpected increases in construction costs or repair expenses.

Sources

  1. Insurance Information Institute. "What is covered by standard homeowners insurance?."
  2. Insurance Information Institute. "Homeowners Insurance Basics."
  3. National Association of Insurance Commissioners. "A Consumer's Guide to Home Insurance."
  4. Insurance Information Institute. "ow much homeowners insurance do I need?."
Janet Berry-Johnson
Janet Berry-Johnson

Janet Berry-Johnson, CPA is a freelance writer with a background in accounting and income tax planning and preparation. She's passionate about making complicated financial topics accessible to readers. She lives in Omaha, Nebraska with her husband and son and their rescue dog, Dexter. Visit her website at www.jberryjohnson.com.

Sarah Archambault
Sarah Archambault
  • Experienced personal finance writer

  • Background working with banks and insurance companies

Sarah enjoys helping people find smarter ways to spend their money. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans.

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