Finding the Right Amount of Coverage
There are many types of home insurance policies, and each offers various amounts of coverage for your home’s replacement costs, personal property damage, and personal liability. The first step in making sure a home insurance policy has enough coverage for your individual needs is to determine how much dwelling coverage you need.
Dwelling coverage is the portion of your home insurance policy covering your physical home and the cost of repairing any damages to your home or other connected structures. To find out what dwelling coverage limit is best for your home, you will need to calculate your home’s replacement cost. Generally, if you multiply your home’s square footage by the cost per square foot to build in your neighborhood, you’ll end up with the amount of dwelling coverage your home insurance should include.
Let’s say you just purchased a home in Raleigh, North Carolina. On average, $300,000 will buy you a roughly 2,000 sq. ft. home in Raleigh, and the average cost to build a home in the city is $120 per square foot. This means that a homeowners insurance policy for your $300,000 home in Raleigh should have at least $240,000 in dwelling coverage.
The specific dwelling coverage limit you need also depends on home-specific factors, like your home’s foundation type and any additions you make to your home. But this equation gives you a general idea of the amount of coverage your home insurance policy should include.
The amount of other structures coverage you receive––for things like garages or fences that aren’t attached to your home but are on your property––is affected by your dwelling coverage limit since this amount is usually a percentage of your dwelling coverage. It’s important to make sure you have enough coverage for your home and any other buildings or structures on your personal property. So, if you are worried about having enough coverage for your other structures, you can always increase your dwelling coverage or other structures coverage amount.
Next comes your personal property limit. This protects personal belongings inside your home and is usually automatically set at 50 to 70 percent of your dwelling coverage limit. Using the same Raleigh, North Carolina, example from before, the personal property limit for this home would be about $120,000 to $168,000. The best way to make sure this is enough coverage to replace your damaged or stolen personal belongings is by making an inventory and adding up the value of your most expensive and important possessions. If your inventory value is higher than your homeowners insurance covers, you can ask your insurance agent about raising your personal property coverage limit.
You can also opt for a replacement cost policy rather than an actual cash value policy. Actual cash value policies ensure that homeowners receive coverage for the cost of their damaged items at the condition they were in prior to being damaged or stolen. This means your insurer will give you less money for older items than what you initially paid for them. Replacement cost comes at a higher price but covers the entire cost of replacing any damaged or lost items regardless of their prior condition, so you won’t need to worry about paying to restore or replace your belongings.
The last two coverages to calculate before you get quotes on homeowners insurance rates are your additional living expenses (ALE) and the amount of personal liability insurance you need.
ALE coverage, also known as loss of use coverage, makes sure that your homeowners insurance covers the cost of your living expenses if your home becomes uninhabitable due to a natural disaster. This can help you pay for a stay in a hotel while your home is repaired, for example. According to the Insurance Information Institute, average homeowners insurance policies offer ALE coverage at a standard 20 percent of the insurance on your home.
Personal liability insurance coverage helps protect members of your household in case someone is hurt on your property. If your dog bites a neighbor or a delivery driver trips over your broken front porch steps, liability insurance covers any medical payments and legal fees in the event of a lawsuit. It can be difficult to determine just how much liability insurance you will need, which is why most home insurance policies automatically provide $100,000 in liability coverage. Medical expenses are costly, and so are legal fees, so if you want more coverage, you can raise your personal liability limit as high as $500,000.
Depending on where you live, you may need additional policies like flood insurance or sewage backup coverage. The best way to know what additional policies you will need is to do your research, know what perils affect your area, and ask a local insurance agent what your best options are.
If you find yourself seeking more protection from most of these coverages, you should consider purchasing an umbrella policy. This will ensure that you have the most coverage from your homeowners policy, and you won’t have to worry about facing higher deductibles after a natural disaster or theft.