How Much Homeowners Insurance Do I Need?
When selecting a home insurance policy, aim for enough coverage to protect all of your assets in the event that your home is destroyed in a disaster or you are held liable in a lawsuit.
Homeowners insurance policies typically cover four major areas:
- Dwelling coverage: to rebuild your home.
- Personal property coverage: to replace personal property destroyed by a covered peril.
- Liability coverage: should someone get injured on your property and sue you.
- Additional living expenses (ALE) coverage: to cover expenses if you're forced to temporarily move out of your house.
If the limits on your current policy are insufficient to cover these costs, consider purchasing additional homeowners insurance.
How much dwelling coverage do I need?
You should have enough dwelling insurance to cover the cost of rebuilding your house as well as any attached structures such as a garage. Remember to factor in the cost of replacing built-in appliances like a water heater.
Your policy will provide one of three levels of protection. Unfortunately, some homeowners are unaware that their policy's limits are insufficient to completely replace their homes.
Coverage type | Definition |
Actual cash value (ACV) | The ACV is the market value of your house, minus depreciation. While the value of your land may have increased since you bought it, specific elements of your house, such as the roof, plumbing or floorboards, have aged, and therefore may have depreciated in value. That’s why the ACV likely won't cover the entire cost to rebuild your home with new materials. |
Replacement cost value (RCV) | The RCV is the cost to rebuild your house at current prices for labor and materials. A policy that covers your home's RCV will have a higher price than one that covers only the ACV. RCV coverage could provide a substantial amount of additional reimbursement if you need to replace all or part of your home. However, it is still subject to policy limits. |
Guaranteed replacement cost (GRC) and Extended replacement cost (ERC) | The GRC/ERC is like the RCV, plus a guarantee that the insurance company will pay a certain percentage beyond your policy's limits to rebuild your home. This is relevant if a regional disaster temporarily drives up the cost of labor and building materials. However, this is the most expensive option. |
If you own a condo, certain structural elements of your home, such as the walls, may be covered by the condominium master policy. To determine the amount of dwelling coverage you require for your condo, consult your master policy.
How much does dwelling insurance cost?
The amount of dwelling coverage included in your policy influences the rate you pay significantly. A home with $250,000 of coverage costs 37% more to insure than one with a $150,000 limit, and a $350,000 limit costs 75% more.
Cost of home insurance by dwelling coverage amount
Dwelling coverage | Annual cost | Monthly cost |
$150,000 | $2,096 | $175 |
$250,000 | $2,862 | $239 |
$350,000 | $3,672 | $306 |
Most homeowners insurance companies require that you insure your home for at least 80% of its replacement value. This is referred to as the 80/20 rule. When you file a claim, you will receive less money if you are underinsured.
Assume your home is insured for $200,000 but would require $300,000 to rebuild. If you file a $100,000 claim, the insurance company may reduce your settlement by the percentage that you are underinsured. In this case, you would receive $67,000 less your deductible, and you would be responsible for the remaining repairs.
How much personal property coverage do I need?
A home inventory is the best way to ensure you have enough personal property coverage to replace your belongings.
A home inventory is a detailed and exhaustive list of all the items in your home. That may appear to be a lot of work, but it is necessary if you want to obtain quality replacements for your items if they are destroyed due to a covered loss.
We recommend that you include as many details as possible about each item on your list, such as:
- Each item's name and model.
- If available, a serial number.
- The item's description.
- The price of the item.
- If available, a receipt with the location and date of purchase.
After you've finished your inventory, add up the value of your belongings and compare it to your coverage limits.
How much liability insurance do I need?
If you are sued for destroying someone's property or causing an injury, personal liability insurance will cover the cost of the lawsuit. As a result, the amount of liability coverage you require is determined by the value of your assets.
For example, if your dog bites a neighbor or someone falls into your pool, you may be liable for their medical bills. If your liability coverage limit is $100,000, but you are found liable in a $250,000 lawsuit, you must pay the $150,000 difference, and your personal assets may be taken into account in the settlement.
How much is liability insurance?
Fortunately, liability insurance is usually one of the most affordable parts of a homeowners insurance policy. The difference in cost between $100,000 and $300,000 in liability coverage is only $18 per year, and coverage for $1 million costs as little as $5 per month.
Liability coverage | Annual cost | |
$100,000 | $16 | |
$300,000 | $34 | |
$500,000 | $47 | |
$1,000,000 | $62 |
If you're concerned about not having enough liability coverage, you could look into purchasing an umbrella policy.
Which assets are at risk in a lawsuit?
Most of your belongings, such as money in a bank account or your vehicle, are at risk if you are sued and do not have adequate insurance. Some assets, such as retirement funds, are, however, immune from suit. Both Roth and traditional IRAs are protected up to $1 million under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), and this amount is adjusted for inflation every three years.
In a bankruptcy, SEP IRAs, SIMPLE IRAs, and most rollover IRAs are fully protected from creditors up to any amount. Furthermore, money in a company-sponsored 401(k) is exempt, and home equity is protected in some states, such as Florida.
Assets at risk in a lawsuit | Assets that may be protected |
Vehicles titled in your name | 401(k)s |
Boats | IRAs |
Business assets that you personally own | Annuities |
Non-dwelling real estate | Home equity |
Future wages | Social Security benefits |
Money in your bank accounts | |
Investments | |
Personal items |
Each state has different laws regarding how well your retirement funds are protected in the event of a lawsuit, so you should review your state's laws to determine what is at risk.
How much additional living expenses coverage do I need?
The majority of insurers base your additional living expenses (ALE) coverage on a percentage of your total dwelling coverage amount. It is typically 30% for standard homeowners insurance and renters insurance policies. So, if your policy has a dwelling coverage limit of $500,000, your ALE coverage limit is $150,000. Your ALE coverage amount for a condo can be up to 50% of your dwelling coverage limit.
If you are temporarily displaced while your home is being repaired, ALE coverage can be critical. For example, if your house is damaged in a fire and will take two months to repair, you will have to rent another home until your house is livable again. In this case, ALE coverage may cover the following costs to ensure comparable living conditions:
- Rent or hotel fees
- Gas for traveling between your house and temporary home
- Moving costs
- Food costs, if your temporary home doesn't have a kitchen
What type of insurance do I need?
Though we often refer to "homeowners insurance" in a broad sense, there are various types of homeowners insurance that provide varying levels of coverage.
- An HO-1 policy only covers damage caused by a peril specifically mentioned in the policy. Unlike other types of homeowners insurance, it typically does not cover damage to your personal belongings inside your home, only damage to the home's structure. It also does not usually include liability coverage.
- An HO-2 policy only covers damage caused by a peril specifically mentioned in the policy. It protects your personal belongings as well as the structure of your home from damage.
- An HO-3 policy is the most common type of homeowners insurance. Unless the damage was caused by a peril specifically excluded from your policy, all structural damage to your home is covered. In contrast, only a portion of the damage to your personal property is covered. The peril that caused the damage must be mentioned specifically in the policy.
- An HO-5 policy covers all damage to the structure of your home and your personal property unless the peril that caused the damage was specifically excluded from the policy.
- An HO-8 policy is designed for an older home with a replacement cost greater than the home's actual cash value. It only provides coverage when damage is caused by a specific peril.
The limited coverage provided by a HO-1 policy makes it an unpopular choice. Only 1.5% of homeowners insurance policies are classified as HO-1. If you do have a HO-1 policy, you should consider whether you're truly comfortable paying out of pocket to replace all of your possessions and foregoing lawsuit protection.