If you’re a homeowner, having insurance is incredibly important. Purchasing a home is one of the biggest investments you’ll ever make. To protect your home and your belongings, you need reliable insurance coverage. However, the answer to, “how much homeowners insurance do I need?” is a personal decision. 

Homeowners insurance doesn’t just protect the physical structure of your home and the things inside. It’s also financial protection. Without insurance, you have to pay out-of-pocket to make repairs or rebuild your home if it gets damaged or destroyed.

When you’re shopping for home insurance, there are four key areas that you will want coverage for. These come standard with many insurance policies, but not all, depending on the type you choose. The four areas are the structure of your home, your belongings, liability for injury or damages and loss-of-use if something happens so you can’t use your home temporarily. What you need in these categories will help you answer the question, “How much insurance do I need for my house?” for yourself. 

What to protect in your home 

When you’re deciding what homeowners insurance coverage amount is right for you, there are many different factors to consider. To make things easier, start by looking at the cost to rebuild your house and the value of the belongings inside.

Although these two factors are related, you should calculate them separately and add them to get an accurate estimate of the coverage you need. Home insurance policies cover the outside of your home separately from the interior, and they usually come with a default amount of coverage. However, you can increase or decrease the coverage depending on your situation.

Additionally, every insurance policy has a limit. A policy limit is the highest amount of money the insurance company will pay to reimburse you for a covered loss. Insurance providers will often determine policy limits for certain coverages based on the amount of dwelling coverage you have. 

The table below includes the types of coverage that most home insurance policies provide, and the average policy limit for each based on $300,000 in dwelling coverage.

What is the rebuild cost of your home? 

The coverages listed in the table above are included in an HO-3 home insurance policy, which is the most common type of home insurance. It’s designed to cover the rebuild cost of your home, which accounts for the size of the home, cost of materials, added features and so on. Keep in mind that the rebuild cost is not the same as the market value.

There are home insurance policies that are less expensive than HO-3 policies, but they don’t offer as much coverage. If you don’t have enough insurance coverage, you could be stuck paying out-of-pocket for major repairs that aren’t fully covered. 

What impacts the rebuild cost?

When you’re asking, “How much should I insure my home for?” you want to make sure your insurance gives you enough protection if you need to rebuild your home. Your home’s rebuild cost is more than what you can see from the outside. Here are some of the factors that impact your home’s rebuild cost:

• The roof: The materials used to build the roof impacts the rebuild cost, i.e. slate roofs are much more expensive than metal roofs.
• Home renovations: The rebuild cost will be higher if you have recently renovated your home.
• The number of bathrooms: More bathrooms means more appliances and plumbing.
• The style of the home: Certain home styles are more expensive to build than others.
• The type of walls: The wall materials can determine the cost of the rebuild.
• Customized features: If your home had a pool, security system, or other customized feature, the price will be included in the rebuild.

Should I get extended replacement cost coverage? 

If you don’t feel like you have enough coverage to rebuild your home, you can get extended replacement cost coverage. If you have extended replacement coverage, the insurance company reimburses you for what it would cost to rebuild or repair your home to its condition prior to the damaging event. 

Extended replacement cost coverage is usually at least 20 percent more than your dwelling policy limit. For example, say you have $300,000 in dwelling coverage. With extended replacement coverage, you would have $360,000 in coverage. If your home caught fire and resulted in $350,000 in damage, the insurance company would pay the entire cost of rebuilding and repairing your home after you pay your deductible. Without extended replacement cost coverage, you would be responsible for paying the additional $10,000 that your dwelling insurance didn’t cover.

Extended replacement coverage does not account for inflation and labor costs. However, some insurance providers have endorsements to cover the fluctuation of those things. Some of the endorsements you can get include:

• Guaranteed replacement cost: This will cover the entire cost of rebuilding your home, back to it’s exact previous condition. It does account for labor costs.
• Inflation guard: An inflation guard policy grows at the same rate as inflation, which helps to rebuild you home with unforeseen inflation costs.
• Law coverage: Helps you pay to replace parts of your home that have to be rebuilt due to ordinances, city code regulations, etc.

Who should consider this?

If you’re worried that your insurance won’t cover your home’s rebuild costs and you can afford the additional cost of your premium, extended replacement cost coverage is a wise idea.

How much personal property coverage should I get? 

Personal property insurance covers your personal items like clothes and appliances. It’s usually 50-70 percent of your dwelling coverage. To determine how much personal property coverage you need, here’s what you should do:

• Make a home inventory: A home inventory is a list of all the items you own and their original value. Use the total amount to determine how much coverage you need.
• Check your property reimbursement terms: Read your policy to determine what type of reimbursement terms you have. It will either be actual cash value or replacement cost value. Make sure it’s sufficient for your needs.
• Check your coverage limit: Know your personal property coverage limit, and make sure it matches the total value of your items from your home inventory. If you own valuables, consider getting an add-on policy for more coverage.

How much personal liability coverage should I get? 

Personal liability insurance covers your legal fees if you damage someone else’s property or someone gets injured in your home and you get sued. This type of insurance protects you from the highest risk. To determine how much liability coverage you need, consider your lifestyle, how many people come to your home and the type of gatherings you have, if any.

If you often have people in your home, especially people you don’t know well, personal liability insurance will be important. You could also get a personal umbrella policy for even more coverage.

Do you need additional coverage? 

Insurance companies offer add-on coverages for people who want even more protection beyond what their basic policy offers. To determine if you need additional coverage, consider where you live. For example, if you live in a state where hurricanes happen often, flood insurance is something to consider. If you own valuables, like jewelry or art, you can get specific policies to cover those items.

The takeaway

Having home insurance is important. Not only does it protect your physical house and your belongings, but it also protects you as a homeowner. When you’re shopping for home insurance and asking, “how much insurance do I need for my house?”, it can be difficult to understand all the different types of coverage and their limits. Use this as a guide to figure out what kind of coverage you need, and how much, to give you the most protection.