How to Estimate Your Homeowners Insurance

When calculating the cost of homeowners insurance, you must consider the following factors:

1. completely rebuilding your house at today's labor and material costs
2. your personal belongings
3. all of your personal assets that would be at risk if you were found liable in a lawsuit

These three figures, when added together, help determine the amount of coverage you need in your home insurance policy.

How much does home insurance cost?

Over the last ten years, the average cost of home insurance has risen by more than 47 percent, with the national average standing at $1,445 in 2020. Your rates may differ significantly from the national average due to a variety of factors such as your location, the construction material of your home, and the amount of property you're insuring.

Comparing home insurance rates in three very different states demonstrates how these factors can interact.

The cost of insuring a home is directly proportional to its risk of damage. Increased risk leads to an increase in insurance claims, which raises rates. Because of their vulnerability to frequent, powerful storms, Texas and Florida are more expensive markets for home insurance. New York has lower rates, in part because it is less vulnerable to damaging wind events.

How to perform your own home insurance estimate

To calculate your homeowners insurance premium, begin by asking yourself a series of questions about your home, personal property, and regional risks. These are some examples:

• How much would it cost today to rebuild your house?
• What regional risks, such as high humidity or a proclivity for flooding or fire, put your home at risk?
• What is the total value of your personal belongings, excluding vehicles?
• What is the total value of your at-risk assets if you are sued?

Your responses to these questions will assist you in determining the coverage limits you require in your home insurance policy.

A homeowners insurance policy is divided into three coverages that protect various aspects of your property. These protections include:

1. Dwelling insurance protects your home and its contents, including the roof, plumbing, and built-in appliances.
2. Personal property insurance covers personal belongings such as clothing and furniture.
3. Liability insurance covers legal fees if someone sues you for causing injury through negligence.

Buying more coverage means paying more money, but it's critical to insure the full value of your home and belongings. Answering the questions above truthfully and accurately will assist you in selecting home insurance coverage that is both affordable and adequate.

What is the replacement cost of your home?

The replacement cost of your home is the amount of money it would take to rebuild it if it were completely destroyed. You should have sufficient dwelling coverage to cover that amount.

Because it does not include the value of the land your property sits on, the replacement cost of your home is typically lower than the resale value of your home.

It is difficult to calculate the exact replacement cost of your home. Typically, home insurance companies will use a combination of publicly available data and information you provide to determine the replacement cost of your home for you. Insurers frequently inspect newly insured properties to ensure that the coverage you purchased corresponds to the amount you actually require.

You can get a more accurate understanding of how replacement cost is calculated by hiring an independent professional who is familiar with local building costs to prepare an estimate for you.

Creating your own replacement cost estimate for your home

If you want to make your own estimate, look up the average cost per square foot of building a home in your area and multiply it by the square footage of your home. While the national average is around $150 per square foot, prices vary greatly by state.

Next, determine the cost of your home's major components. The cost of these components varies as well, so you'll need to contact local suppliers for pricing.

• Roofing
• Exterior features: siding, stonework
• Flooring: carpet, tile, hardwood
• Cabinets and interior fixtures

Home insurance coverage limits

When deciding on the specific coverage to purchase, you'll also need to select one of three policy types, which determine how much of your home's value you receive if it is damaged or destroyed.

Actual cash value (ACV) is the total cost to rebuild minus depreciation.In practice, buying an eight-year-old water heater is usually not a good idea, so you'll most likely have to pay the difference out of pocket. Similarly, under an actual cash value policy, if your home was completely destroyed, you would pay the difference between the depreciated value and the replacement cost. Because of the limitations of ACV coverage, it is also quite inexpensive.

Replacement cost value (RCV) of your home is the amount it would cost to rebuild it based on current prices at the time you begin your policy. Replacement cost coverage is more expensive than an actual cash value policy, but it guarantees that your claim will not be reduced to account for depreciation.

However, even replacement cost value coverage may fall short of a full reimbursement if a local disaster raises labor and material costs. This is where the next level of homeowner's insurance comes in.

If you have guaranteed or extended replacement cost (GRC or ERC) coverage, your insurance company will pay a certain percentage more than the replacement cost of your home if a regional disaster temporarily raises the cost of labor and materials in your area. This additional security comes at a cost, and this is the most expensive policy limit available.

What regional risks are excluded from my policy?

You should think about whether any regional factors pose a threat to your home and whether those threats are covered by a standard home insurance policy. The majority of home insurance policies include an open peril list of covered events that protect against the majority of common disasters.

Hazards such as regional flooding, on the other hand, are typically excluded and necessitate the purchase of a separate policy in order to obtain coverage.

What is the replacement cost of your property?

In general, homeowners insurance companies set the limit for personal property insurance at 50% to 75% of the limit for dwelling coverage. So, if your dwelling coverage limit is $200,000, your personal property coverage limit is likely to be between $100,000 and $150,000, depending on the company and policy you select.

The value of your personal belongings will naturally determine whether this amount is sufficient for you. To determine how much personal property insurance you require, make an inventory of the personal belongings that must be covered under the policy. Among these are, but are not limited to, the following:

• Clothes
• TVs and speakers are examples of electronic devices.
• Appliances for the kitchen
• Power tools
• Furniture
• Artwork
• Jewelry

Keep a list of each item and its replacement cost. It's also a good idea to go through your house and photograph your most important and valuable possessions as you go. This documentation will assist you in remembering items you've lost if they are stolen or destroyed, as well as serving as proof of possession in the event of a claim.

It is important to note, however, that certain items may not be covered by your policy. Vehicles are an obvious exclusion because they are covered by their own insurance policies even when parked in your garage or driveway.

Individual limits on categories and, in some cases, individual items apply to high-value items such as furs, artwork, and jewelry. If these limits, which are typically in the thousands of dollars, are insufficient for your belongings, you can purchase a schedule or endorsement to expand coverage in specific categories.

You'll know how much personal property insurance you need after you've taken an inventory of everything you own. Submitting your inventory to your insurance company can provide documented proof of your possessions. This will support any future property insurance claims you make. Annually, update the inventory to account for items you've added or removed.

What is the total value of your at-risk assets?

The amount of personal liability insurance you need is determined by the total value of your assets at risk. These are your personal assets that are not expressly exempt from liability lawsuits by your state or the federal government.

If you are sued and do not have adequate liability insurance, the majority of your belongings are at risk. Some assets, such as retirement funds, may, however, be exempt from lawsuits. Each state has different rules regarding how legal actions affect retirement funds, so you should review local laws to determine what is at risk.

Most home insurance companies provide a minimum of $100,000 in liability coverage, with the option of increasing it to between $300,000 and $1 million. The premium difference when you choose higher liability coverage can be minor, so we recommend going with higher limits on your policy if you can afford it.

For example, here are some State Farm sample costs for various liability insurance limits:

Rates based on a one-time sampling of State Farm home insurance premiums from Quadrant Information Services. Your own rates may be different.

If your total assets exceed the liability limit of your home insurance policy, consider purchasing an umbrella policy to provide additional liability protection.