Protect your home investment and well-being
Most people know that they must purchase homeowners insurance when buying a new home, but many still wonder, “How much homeowners insurance do I need?”
Understanding your homeowners insurance, coverage, and how it affects the outcome of an emergency or disaster is key to protecting your home. Choosing the right amount of insurance coverage keeps homeowners insurance costs under control while keeping your investment secure. Learn how to determine how much homeowners insurance you need.
Homeowners insurance is a contract between the homeowner and an insurer. In exchange for a monthly payment or premium, an insurance company pays money back to the homeowner if the property experiences damage resulting from emergencies or if financial damage happens due to negligence or other unusual circumstances. The amount the insurer pays after the consumer makes a claim has limits according to specifications in the contract.
Homeowners insurance isn’t a one size fits all product. The trick to understanding how homeowners insurance works and how much coverage you need is to break the policy into several chunks. Although insurers provide standard packages with average categorical coverage limits, their policies are generally customizable to fit individual needs. Typically, you can choose coverage amounts depending on certain risk factors and your financial situation.
When you purchase a homeowners insurance policy, you’re paying for several types of coverage. You’ll choose coverage limits in each category, and different events, like a fire or hurricane, may trigger payments from one or more categories simultaneously. The coverage limits represent the maximum amount the insurer will pay after a particular event. Let’s review the seven types of coverage to help you determine how much you need.
The first thing to come to mind when talking about homeowners insurance is likely dwelling coverage. Dwelling coverage pays you to repair or replace part or all of your home if it experiences damage from fire, severe weather, or another natural disaster. The disaster that causes the damage must be listed in your policy to trigger payment.
Your coverage amount should equal the cost of replacing the entire home after a disaster. The dollar amount of coverage you need may differ from the home's selling value. Insurance agents are experts in determining local construction costs to replace your house.
As the name indicates, personal property insurance covers the cost of the items you own in your house. Homeowners policies often set the dollar limits of coverage between 50% and 70% of the dwelling coverage amounts. However, you may require more or less than that amount, depending on the value of your personal items.
To determine how much personal property coverage to pay for, assess the items in your home that aren’t part of the structure. For example, if you own several high-value family heirlooms, you likely need more personal property coverage. Your insurance company may offer limits in the form of actual cash value or replacement value of the items. An insurance agent can help you set your policy limits for personal property coverage.
Additional living expense coverage pays you back for extra money you spend while repairs or rebuilding of your insured home take place. Additional living expense insurance will cover much of the cost if you need to move into short-term housing while rebuilding your house due to disaster damage.
Determine how much coverage you need by estimating the cost of living outside your house for the maximum amount of time it would take to reconstruct the building.
Structure coverage on your homeowners insurance policy pays for damage to buildings or items on your property that aren’t your home, including detached garages, fences, playgrounds, and decks. Add up the value of these home structures and choose a limit that covers the cost of replacing them.
Personal liability coverage pays for legal lawsuit fees and medical or property loss costs if you’re found negligent in a situation that causes a loss of money or negatively affects the well-being of someone else on or near your property. Some examples of this tricky coverage type include your dog biting someone, a dead tree in your yard falling on your neighbor's house, or someone getting hurt by slipping and falling on your icy sidewalk.
Typically, the coverage limits range from $100,000 to $500,000 for this category. Aim for higher coverage amounts if you tend to host events in your home or have other risk factors. If you feel that the maximum amount your policy can provide is too low, consider adding an umbrella policy to cover your risk. Umbrella policies can also protect your savings and assets if you have a high net worth.
Medical cost coverage pays for the cost of care for a person or persons who suffer a minor injury while on your property. Unlike liability coverage, medical cost coverage pays regardless of fault in the incident. Limits are typically set no higher than $5,000 per occurrence and often less.
You can determine how much coverage you need based on risk factors that someone may get hurt on your property. Making a medical cost claim can often reduce the risk of a lawsuit in which liability coverage would come into play.
Add-on insurance coverage is just as it sounds. An ordinary homeowners insurance policy covers the incidents that most commonly occur. However, damage and liability sometimes result from catastrophes that aren’t part of your policy.
Additional coverages can include the following:
Earthquakes
High-value art and antiques
Sewage back-ups
Sinkholes and mine collapse
Aggressive breed dog coverage
Another important thing to know about homeowners insurance is that companies assign value to your property, possessions, and coverage limits based on actual cash value or replacement costs. The actual cash value (ACV) of something is the dollar amount that it would be worth if you were to sell it. In other words, the value of the item minus depreciation. The replacement cost of something is the amount it would cost to purchase a new item to replace a damaged one, regardless of its actual value.
For instance, the ACV of an old piece of furniture may only equal the dollar amount that it would sell for in a garage sale, while the replacement cost would equal the price tag of a new, similar piece.
When choosing how much homeowners insurance to purchase, ensure you know whether the policy lists items and coverages by their ACV or replacement cost.
Your homeowners insurance policy shouldn’t be a static, unchanging entity. Some insurance policies will automatically update annually to reflect inflation or local market fluctuations. However, reviewing your policy and coverage amounts from time to time is a good practice that will keep you financially safe while keeping costs as low as possible.
An excellent time to look at your homeowners insurance coverage amounts is after remodeling or building an addition on the property. Having a nearby home appraiser assist you in determining the value of your property every few years will help you decide if you need to make policy adjustments.
