How Much Homeowners Insurance Coverage Do I Need?

Homeowners insurance policies don’t come in one-size-fits-all packages. Although the home insurance quotes you receive might include standard coverage levels, you can adjust them higher to fit your needs. When deciding how much home insurance coverage is right for you, consider the value of your personal belongings and the cost to rebuild your home if disaster strikes, along with other factors, such as your budget.

While most standard homeowners insurance policies provide all the coverage many homeowners need, you may want to add optional coverages to protect against specific local risks, such as earthquakes and floods.

Understanding what a standard home insurance policy covers and excludes, and the optional coverages available, is key to designing a policy that protects your assets.

What Does Homeowners Insurance Cover?

When you purchase a homeowners policy, you agree to pay premiums and the insurer agrees to pay for covered losses according to the policy terms. Most comprehensive home insurance policies include six types of coverage:

• Dwelling (Coverage A): Dwelling coverage covers your home’s main structure and attached structures such as a carport or garage. It can also help pay for covered losses to systems such as permanently installed air conditioners, electrical wiring, heating units, and plumbing.
• Other structures (Coverage B): Coverage B covers detached structures on your property such as a garage or shed.
• Personal property (Coverage C): Following a covered loss, personal property coverage can help pay to replace your home’s contents, such as clothing and furniture.
• Loss of use (Coverage D): If you must move out of your home following a covered loss, Coverage D can help pay expenses such as lodging, meals, and storage.
• Personal liability (Coverage E): Personal liability coverage can help pay your expenses if you or a member of your household are responsible for the injuries of another person or their property. For example, if a tree in your yard falls in a windstorm and crashes into your neighbor’s house, Coverage E can help pay the repair costs. Or if someone sues you after slipping and falling on your driveway, this coverage can help pay your legal expenses.
• Medical payments (Coverage F): Coverage F can help pay medical expenses when someone outside your household sustains an injury on your property, such as a child in the neighborhood playing in your yard. Depending on the terms of your policy, medical payments coverage may also cover the medical expenses of another person if a member of your household causes injury to another person on another property.

The most popular type of homeowners policy form is the Special Form, commonly called HO-3. Homeowners policies cover losses caused by certain types of perils, such as fire, theft, or windstorms. While some policy forms cover perils named in the terms of the policy, HO-3 policies cover all perils except those specifically excluded. Typical HO-3 exclusions include losses caused by earthquakes or floods.

However, the all-perils coverage only applies to damages to your home. HO-3s only cover personal property based on named perils. 

Recommended Dwelling Coverage Amounts

Typically, a standard home insurance policy includes sufficient dwelling coverage to completely rebuild the house. The industry refers to this value as the home’s replacement cost. The insurance company may use several factors to determine the replacement cost, such as the home’s market value or purchase price. Replacement cost doesn’t deduct value for depreciation, but should reflect the cost to rebuild using similar materials.

The North Carolina Department of Insurance recommends carrying dwelling coverage equal to at least 80% of the replacement cost. In some cases, an insurer may write a policy for 100% of replacement cost. But keep in mind that a standard home insurance policy will only pay up to its limit.

Rebuild Costs

Common factors that can impact rebuilding costs include:

• Square footage
• Style of home
• Number of rooms and bathrooms
• Type of construction, such as wood frame or masonry
• Type of roof materials
• Special features, such as trim and fireplaces
• Custom features
• Attached and unattached structures
• Local construction costs

Optional Rebuild Coverages

To avoid undue out-of-pocket costs, purchase an extended replacement cost policy, which typically pays up to 25% to 50% more than your dwelling coverage limit.

Homes not up to current building codes also cost more to rebuild. If you own an older home that is not up to code, consider adding an ordinance or law rider to your homeowners policy. This type of coverage helps pay the extra cost of bringing the home up to code following a covered loss.

Recommended Personal Property Coverage Amounts

To determine how much personal property coverage you need, take a thorough inventory of your home’s contents and calculate how much it would take to replace each item. Most standard home insurance policies pay actual cash value for personal property losses, which deducts for depreciation. For instance, if you buy a TV for $1,000 and it is destroyed in a fire three years later, the insurance company would likely only pay a few hundred dollars.

Replacement cost coverage pays the amount needed to replace your belongings with comparable items at current market prices. A few providers offer replacement cost coverage in their standard policies; others provide replacement cost riders.

Insurance carriers typically calculate replacement cost coverage as 50% to 70% of your dwelling coverage. Depending on the type of possessions you own, you might need more coverage.

Homeowners with high-value specialty items such as jewelry, cameras, or fine art should purchase additional coverage. Some providers offer valuable-items coverage, which you can often add as an endorsement to your standard home insurance policy. Some valuable items endorsements require you to name the specific item or collection of items you want to cover, while others cover different types of belongings up to specified limits, without requiring you to itemize.

Recommended Liability Coverage Amounts

Typically, standard homeowners policies set liability coverage limits at $300,000 to $500,000, but some set as low as $100,000. Personal liability coverage is designed to protect your assets if you are sued due to bodily injuries or damage to property for which you are liable. The coverage extends to everyone in your household, as well as pets, and can help cover lawsuits, including court costs and damages. Typically, you should carry liability coverage equal to or exceeding your assets, including investments and properties.

As with other types of coverages, personal liability coverage excludes certain types of claims. While the coverage might cover incidents stemming from certain types of negligence, some don’t cover business-related incidents. Liability coverage won’t cover lawsuits related to intentional acts. For instance, your liability coverage should cover the cost of glass replacement if your lawnmower throws a rock through your neighbor’s windshield, but it won’t cover the damage if you get angry and intentionally break the windshield.

If your home insurance provider doesn’t offer personal liability limits high enough to protect your assets, you can purchase a personal umbrella policy. Umbrella policies can offer liability protection for lawsuits stemming from incidents involving your automobile, boat, business, or home. A policy may also cover defamation of character, invasion of privacy, libel, or slander lawsuits. Typically, umbrella policies start at around $1 million of coverage, with the option to purchase coverage up to $10 million or more.

Other Coverage Considerations

A standard home insurance policy might not provide all the protections you need. Often, you can broaden your coverage by adding endorsements or riders to your basic coverage. Most homeowners policies don’t cover flood damage to your home or possessions. If you live in a designated flood zone and have a mortgage, the lender will require you to purchase a flood insurance policy.

Some insurers don’t cover hail and windstorm damage for homes located in coastal areas. If you live along or near the coast, look for a carrier that specializes in covering coastal properties. Your area may also have organizations that provide storm-related coverages. For example, the Texas Windstorm Insurance Association offers hail and wind coverage for Texas Gulf Coast properties.

Few standard homeowners insurance policies cover dwelling or personal property damages caused by earthquakes. However, following a quake, earthquake insurance can help offset the cost of repairing or rebuilding your home, replacing damaged personal property, and temporary housing. Homeowners living in areas prone to earthquakes need earthquake insurance.

Other optional coverages to consider include:

• Business property coverage
• Electronic data recovery coverage
• Equipment breakdown coverage
• Identity-theft restoration coverage
• Musical instrument coverage
• Sports equipment coverage
• Water-backup coverage
• Yard and garden coverage

Compare Your Homeowners Insurance Options

Before shopping for home insurance, determine the types and amounts of coverage you need. Look for companies that can provide the levels of standard and optional coverages required for your property.

Before buying a policy, check with your state’s department of insurance to find out if the provider you’ve chosen is licensed in your state. You can also check the carrier’s financial-strength rating on the AM Best website.

Premium costs are important to most homeowners, so get quotes from several insurance companies. Also compare each provider's discounts, which can sometimes substantially reduce your rate.

Frequently Asked Questions (FAQs)