How to calculate how much homeowners insurance you need
How much insurance you need depends on many factors, including the value of your home, belongings, and other assets. Experts have established guidelines to help you determine how much is enough for your situation.
1. Calculate the value of assets to protect with liability insurance coverage
Your home insurance’s liability coverage protects your assets in the event you’re sued because of an injury you, a family member, or a pet causes to another individual, or damage you, a family member, or a pet causes to someone else’s property.
The typical homeowners policy provides $100,000 in liability coverage, according to the Insurance Information Institute. If the total value of your assets is higher than that, you risk having to pay a judgment out of pocket.
Say you have investment accounts worth $200,000, and you lose a lawsuit for $200,000. If you only have $100,000 in liability coverage, you’ll have to use half your savings to cover the rest of the judgment.
Insurance companies offer “excess liability” coverage, also called umbrella coverage, that expands the standard coverage homeowners insurance policies provide.
Learn More: How Much Does an Umbrella Policy Cost?
2. Calculate the cost to rebuild your home
In a worst-case scenario, where your home was a total loss, your ability to rebuild would depend on having enough insurance for the structure. Determining how much replacement cost home insurance you need requires estimating how much it would cost to rebuild your home.
The Insurance Information Institute recommends contacting a local real estate agent, home builder association, or insurance agent to find out the average price per square foot to build a home similar to yours in terms of size, style, special features, and materials used. Multiply that figure by your home’s square footage for a base coverage limit.
Also, consider whether you need a “modified replacement cost” policy that covers the cost of rebuilding an older home to current building standards and codes. If that’s not possible, State Farm recommends that you make sure your coverage will, at the very least, provide you with enough money to build a home of acceptable size and quality.
Remember to include the cost of rebuilding a garage or other structures on your property.
Helpful Tool: Homeowners Insurance Replacement Cost Calculator
3. Inventory your personal property
It’s a good idea to go through your home and make a list of all the belongings you would want to replace if they were damaged or destroyed in a covered loss. As you add items to the list, make a note of when you purchased them, jot down the serial or model numbers, and estimate how much each item is worth, Farmers Insurance advises.
While estimating value, consider both the depreciated value and replacement value, which is how much it would cost to buy the item new. Tally up both values to find the actual cash value and replacement value of your belongings.
4. Compare depreciated value vs. replacement value
Homeowners insurance usually limits personal property coverage to 50% to 70% of your dwelling coverage, according to the Insurance Information Institute, so see how each value compares. Then decide whether you’d prefer to be reimbursed for the actual, depreciated value or the full replacement value. Full replacement cost coverage costs slightly more but offers much more protection.
Keep in mind that homeowners insurance typically limits coverage for valuables such as jewelry, electronics, and collectibles. You might need to add an endorsement to your homeowners policy for better coverage of these items.
Check Out: Actual Cash Value vs. Replacement Cost: Which Is Best?
5. Calculate your regular living expenses
Homeowners insurance policies include additional living expenses, or loss of use, coverage that pays for food, housing, and other necessary expenses you incur if you’re displaced from your home while it’s being repaired or rebuilt after covered damages. It also reimburses you for lost rent if you rent the home to a tenant who’s displaced.
In most cases, homeowners insurance provides additional living expenses coverage totaling 10% to 30% of your dwelling limit, depending on the kind of policy you have, according to the International Risk Management Institute. Compare your anticipated expenses to those limits.
6. Determine whether you need flood insurance
Homeowners insurance doesn’t cover flood damage, but you can purchase flood insurance separately. If you live in a known flood zone, your mortgage company will likely require you to buy this type of coverage.
Learn More: Flood Insurance Coverage: What It Includes and What It Doesn’t