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How Much Homeowner's Insurance Do I Need?

9 Minute Read

What’s one of the biggest—and worst—risks you can take when buying homeowner’s insurance?

Not buying enough.

If a wildfire devours your home and you’re forced to rebuild, wouldn’t it be awful to discover you don’t have enough homeowner’s insurance to cover costs? You don’t need us to tell you the answer is yes! Unfortunately, three out of every five Americans could face that exact situation because they don’t have a clue they’re underinsured—some by 20%.(1) It’s crucial to have the right amount of coverage for your home. And we’re here to help you do just that.

Basically, you want enough homeowner’s insurance to:

  • Rebuild your home (extended dwelling coverage)
  • Replace your stuff (personal property)
  • Cover injuries and damages that happen on your property (liability)
  • Reimburse your living expenses after the loss of an insured home (additional living expenses)

1. How Much Dwelling Coverage Should You Have?

First, you want to buy the right amount of homeowner’s insurance for, well, your home.

Dwelling coverage promises to rebuild your home if it burns down, crumbles in a windstorm, or explodes without warning. When you hear dwelling coverage, think the structure of your house, all the materials used to build it, and anything attached to it, like a garage, deck or front porch.

How much do you need?

This one’s a no-brainer: Your dwelling coverage should equal the replacement cost of your house, which is the amount of money it would take to build a replica of your home.

You should definitely have replacement cost coverage for your home.

How do you calculate the replacement cost?

Calculating the replacement cost can be tricky. To be sure you have a good estimate, use the next three steps to calculate the closest estimate.

First, take the square footage of your home and multiply it by local construction costs. You can find these costs on most construction companies’ websites, or you can ask your independent insurance agent to look up those costs for you.

Next, use an online calculator to get a second estimate. Craftsman Book Company has a free online calculator that uses your home’s square footage, building materials and number of rooms to give you a good replacement cost estimate.

Third, once you have your own estimate, ask a professional to give you theirs. An expert independent insurance agent, like one of our Endorsed Local Providers, will know the local area and can help you calculate a very close estimate of the replacement cost.

What factors affect the replacement cost?

When you finally have an accurate replacement cost, you should check it every couple of years. To do that, be sure to watch for these five factors that affect replacement costs.

1. New building codes that were set up after your home was built

If a natural disaster wipes out your current home, your new home will have to meet up-to-date building codes which could require you to pay for new safety features. Insurance companies sometimes offer building code coverage, which means they’ll pay for whatever the new codes require—so ask your insurance agent if that’s something you could add to your policy.

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2. Remodeled kitchens

Home is where the kitchen is, so it’s no wonder kitchen renovations change home values. Quartz or granite countertops, double tub stainless steel sinks, resilient flooring—whatever you’ve added, adjust your homeowner’s insurance to match the increase in your home’s value.

3. Additional rooms and structures

Perhaps your family grew so you finished your attic to add bedroom space. Or maybe you added a garage, a workshop or a screened-in porch. New rooms add value, and unless you update your homeowner’s insurance to account for these additions, you risk having to pay for them again. No one wants that responsibility.

4. Rising prices of building materials and construction costs

Bricks, timber and stone cost more over time, especially if a natural disaster has wrecked your part of town, stirred up demand, and lowered supply. Along with building materials, workers’ wages may increase, and construction costs will often go up with them.

5. Old and hard-to-replace features

"They don’t build ’em like they used to!" Yep, that’s right. Building styles change over time, and so do the number of carpenters who know how to make arched windows and elegant ceiling molds. If your house has unique features, especially ones that require specialized craftsmanship, you may need to pay extra to have them replaced.

Take our 5-minute coverage checkup to make sure you have what you need.

2. How Much Personal Property Coverage Should You Have?

Now that you have coverage for the structure of your home, let’s get coverage for your stuff—what most homeowner’s insurance policies call personal property coverage.

Personal property applies to your furniture, appliances, clothes, sports equipment, electronics and even the food in your refrigerator. (This coverage is, after all, personal.) It covers your stuff if it’s destroyed, stolen or vandalized.

How much is enough?

You should have enough personal property coverage to replace all your belongings. A good question to ask yourself is: If I lost everything, how much would I need to get back on my feet?

How can you calculate the cost to replace your stuff?

Many of us underestimate how much we own. Perhaps it’s because we buy things slowly over time—a road bike here, a flower vase there—so we lose sight of their value. The risk, then, is to underinsure personal property and end up with a shock when the reimbursement check can’t replace the losses.

To prevent this from happening, make an inventory of everything you own. That’s right! Everything. Start in your bedroom and work your way to the garage. Take photos of each possession, especially more expensive items. This may sound like a lot of time, but what takes a few hours to inventory could take a month or two of pay to replace. So, be detailed!

What about rare and expensive items, such as jewelry, furs and musical instruments?

Personal property coverage has its limits. If you own an expensive watch or some high-end sports equipment, you’ll want additional coverage. As you make your inventory, separate your most expensive items. Write down the estimated replacement costs of those items, and ask your insurance agent if you need an additional policy specifically for them.

3. How Much Liability Coverage Should You Have?

With your home and your possessions properly insured, the next step is to load up on liability coverage.

Liability is the part of your homeowner’s insurance that covers your tail if someone gets hurt on your property. Anything can happen: a cracked hip from a slip on the stairs, a broken arm after falling off a rickety swing set, or a dog bite from Snowball, the pet you just knew would never hurt a fly. Then, before you know it, you find yourself stuck in a legal bind that drains your bank account. But wait! There’s hope. Homeowner’s insurance will cover accidents that happen on your property, so you won’t have to pay expensive medical bills or lawsuits.

Most homeowner’s insurance policies have a minimum of $100,000 in liability coverage. But you should buy at least $300,000—and $500,000 if you can. Liability is the greatest buy in the insurance world, so purchase as much as possible.

Side note: Are all dogs covered under my homeowner’s insurance?

No. In fact, if you have a dog whose breed has been flagged by insurance companies as high-risk, any incidents involving your dog won’t be covered under your homeowner’s insurance. If you have one of the following dog breeds, be aware that they are considered high-risk by some carriers.

  • Pit bulls
  • Doberman Pinschers
  • Rottweilers
  • Chows
  • Great Danes
  • German Shepherds
  • Siberian Huskies
  • Alaskan Malamutes
  • Wolf-dog Hybrids
  • Any mix of these breeds

4. Should You Get Additional Living Expenses (ALE) Coverage?

Imagine a tornado destroys your house. How long will it take to rebuild it? A few months? A few years? How much extra money will you spend sleeping in hotels and going out to eat while you wait for your home to be rebuilt?

Hopefully, nothing—if you have additional living expenses (ALE) coverage, that is. ALE is like a super emergency fund: If you and your family were left with nothing after an accident—nowhere to live, no kitchen to use—ALE would reimburse you for the added cost of living without a home.

The keyword here is added cost of living. For instance, let’s say you cook all of your meals, and you pay around $500 a month for groceries. One day, a fire destroys your kitchen, and you’re suddenly forced to go out to eat. Your monthly food bill jumps from $500 to $900. ALE would reimburse you for the extra $400 hit to your food budget.

Most homeowner’s insurance policies use a percentage of your extended dwelling coverage to calculate your ALE—usually between 20–30%. For example, if your extended dwelling coverage is $200,000, your insurer might give you $40,000 (20%) for ALE. If you have a large family and you believe your ALE would be high, ask your insurance agent how you can get more ALE.

Do you have the right amount of homeowner’s insurance?

When it comes to your biggest investment—your home—you can’t afford to be underinsured. That’s why choosing the right independent insurance agent is so important. An insurance agent will help you choose the exact coverage you need—from dwelling to personal property all the way to liability and additional living expenses.

If you want to be sure you have the right amount of homeowner’s insurance, talk with one of our Endorsed Local Providers (ELPs). Each ELP is also an independent insurance agent; that means they work for you, not the insurance company. They’ll find coverage to meet your needs and budget. You can feel confident you’re working with an agent who has your best interest at heart.

Find an insurance ELP today!

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