How Much Home Insurance Do I Need?

Homeowners insurance policy is an investment that will help you insure your residence, and thus, you should settle on how much of this coverage you will need.

Having sufficient coverage in case a disaster happens offers financial protection and helps you compensate for the losses caused: both financial and material-rated. This coverage helps the policyholder stay on top of unforeseen circumstances that may befall their home.

Today, we’ll be getting into the matter of quantity, i.e. answering the question of how much homeowners insurance you need in order to ensure your living space, what may affect the cost of your home insurance, and what are some pros of deciding on this policy.

Stay tuned!

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How Much Homeowners Insurance Do I Need?

If there’s any kind of insurance coverage you might want to skimp on, don’t make it homeowners insurance.

If you’re unprepared to cover a catastrophic occurrence to your home, you could lose everything – your personal possessions, your access to the basic home utilities you need for daily living, to your home itself. Plus, what can you do if an accident happens in your home and you’re found personally liable?

Homeowners insurance can cover all these situations and more. It’s difficult to imagine the devastation when a catastrophe happens and you just don’t have enough coverage. Sure, some of the reconstruction will be covered, but without resources to replace your belongings or finish a build, as well as cover the costs of staying elsewhere while you rebuild – you could be out hundreds of thousands of dollars.

We’ve seen it before, and it does happen! It’s best to make the safest bet rather than wager you won’t experience a fire, tornado, damaging storm, break-in or another catastrophic event that leaves you without the protection you need.

The right agent will help you find the amount of coverage you need, but it’s always good to educate yourself to make sure you have the homeowners insurance coverage needed to get you through any situation. Being underinsured can be disastrous if you need to rebuild or incur significant expenses.

Let’s start out with the different types of coverage. We’ll go through the list from top to bottom, starting with your dwelling amount.

To begin with, it is important to note that if you have bought your home by applying for a mortgage, you are required by your lender to purchase a minimum liability coverage and dwelling coverage. This is a way of protecting both you and the lender.

This means that if you are not under an obligation to repay the mortgage, your insurance agent will not pressure you to purchase this particular insurance policy.

However, that shouldn’t be the case. Although it’s optional from this viewpoint, you should feel the responsibility to protect all your belongings and property from possible damage and injury. Therefore, a good principle would be to determine the coverage limits, and purchase homeowners insurance.

Replacement cost coverage helps you compensate the amount of money that would be needed to rebuild a similar home, provided that yours has been severely damaged.

A guaranteed replacement cost, on the other hand, is an appreciation that is part of some homeowners insurances. Basically, it helps you pay for losses or repairs, even if they cross the limit of your initial coverage.

The difference between replacement cost and guaranteed replacement cost coverage is that this coverage promises to reimburse the costs of building a new houses.

On a related note, actual cash value policies are premised on the depreciated value.

In principle, homeowners insurance policies are aimed at helping you compensate for:

  • Rebuilding costs
  • Replacement cost
  • Reimbursing living expenses
  • Injuries and damages that have occurred on the property

Important side note: If you live in a house that is of older construction, you might want to consider purchasing a modified replacement cost policy. This means that that modern-day materials will be included in construction costs, and not the older, poor-quality ones.

4 Levels of Coverage for Homeowners Insurance

Common homeowners insurance consist of four levels of coverage: liability coverage, dwelling coverage, personal property coverage, and other living expenses coverage. They all help you protect your largest asset, which is your home.

Liability Coverage

Liability insurance is definitely recommended for any homeowner, and it would be a smart decision to purchase as much as you can afford. Liability coverage aims at protecting individuals from getting hurt on your property.

How much liability insurance should homeowners purchase?

Purchasing $100,000 would be enough liability coverage, however, if you have the means, feel free to boost it to $300,000. So much so, if you happen to need insurance that goes beyond liability limits, you should inquire about umbrella insurance policy – a separate excess liability.

Accidents where someone ends up being hurt, falling trees in the backyard, intoxicated visitors and guests, and injured domestic employees are the most common claims.

Personal liability coverage is all about protecting you and your family, primarily financially. This coverage works towards protecting you from cashing-out large sums of money in case you’re found legally responsible for the damage or injuries caused to the other party.

Personal liability insurance can be extended to accidents that occur outside the confines of your home.

Dwelling Coverage

Dwelling insurance coverage, often referred to just as “dwelling insurance” is an integral part of almost any home insurance, and it aims at helping pay for rebuilding or reconstruction costs, in case your home is damaged by a covered peril.

An insurance company will advocate that your dwelling coverage should be equal to your home’s replacement costs. This simply means that this coverage should be predicated on rebuilding costs, and not on your home price.

It’s important to bear in mind that these costs vary, and they could be higher or lower than your home price – all highly depended on the location of your property.

The dwelling coverage limit should be either $100 per square foot of your condo, or 20% of its value. For a clarification purposes, here’s an example:

If you live in a 2,000 square feet home, and the local building costs are priced at $100, that means that it would cost you about $200,000 to compensate for the rebuilding costs.

On a similar note, an extended dwelling coverage represents and additional amount of coverage that is suggested by the insurance company for compensating the costs that exceed the original dwelling coverage.

Personal Property Coverage

Broadly speaking ,personal property coverage involves the protection of anything and everything in your home, except the building itself. Property coverage makes up for your personal belongings (appliances, furniture, clothes, electronics, etc.) being damaged.

Taking into account the “size” it encompasses, how much is considered enough personal property coverage?

Well, the estimating part might be hard for clients, since most of them don’t have a clear idea of all the things they own. To get a head start on the amount, homeowners are encouraged to make an inventory of all the belongings in their home, come up with estimated replacement costs for each of them, and finally consult their agent whether they need additional coverage.

Practically speaking, the personal property limit should be somewhere between 20% to 50% of your home’s coverage limits. Also, various insurance companies can set boundaries for expensive items such as jewelry, antiques, and firearms.

Additional Living Expenses Coverage (ALE)

Additional living expenses coverage is the fourth level of your homeowners policy. This is an “emergency insurance fund” in case you are temporarily disabled from residing on your property.

Additional living expenses ALE is a standard “component” for most homeowners insurance policies, condo and renters insurance policies.

If you have loss of use coverage within your homeowners insurance policy, this will help you pay for temporarily added living expenses that arise from the situation where you’re not able to stay in your home.

ALE coverage is most often calculated as a part of your dwelling coverage, and it should be anywhere from 10% to 30%. If you’re a part of a larger family, feel free to opt for a higher percentage. You may be reimbursed for the following expenses: hotel rentals, restaurant bills, boarding costs, etc.

How To Estimate How Much homeowners insurance You Need?

There are five steps that you need to complete prior to purchasing a homeowners insurance policy. By following them, you will be able to estimate how much coverage you need:

1. Determine the Levels of Insurance You Need

The first, and crucial step to determining how much coverage you need is taking into account the levels that fall under this policy. They consist of:

  • Liability coverage (property damage or injury to someone)
  • Personal property coverage (damage or loss of personal belongings)
  • Dwelling coverage (damage to your home’s structure)
  • Additional living expenses coverage (living expenses for temporary relocation)

2. Agree on the Insurance Deductibles

Once you’ve agreed on the priorities and the approximate amount of money that you’ll set aside for homeowners insurance, it’s time to choose the deductibles.

This implies paying an amount of money up-front. By a large, a typical homeowners insurance deductible ranges anywhere from $500 to $2,000. Of course, the higher the deductible you set at the beginning, the lower your premiums will be.

3. Weigh in Other Factors

Choosing the deductible is not the end of the process. You need to review other factors as well.

For example, if yo live in a house that’s older, then it would probably be a good idea to consider purchasing a modified replacement policy. On the other hand, if your house has a luxurious pool, for example, you could be looking at add-ons.

4. Consider Additional Coverage

In truth, there are natural disaster and hazards that are not included in the standard homeowners insurance. So, if you live in high-risk areas, you should consider purchasing an additional coverage.

5. Compare Quotes

The final step would be comparing quotes between multiple carriers and finding one the one that fits your budget and future plans regarding your home. However, you shouldn’t skimp on inquiring about discounts that make it easier to save money.

What Is NOT Covered By Your Homeowners Insurance Coverage?

Although it covers a vast number of unfortunate events, you should be vary about instances that are not covered by a standard homeowners insurance policy.

Your home insurance policy excludes the following instances:

Earthquake Insurance

Unfortunately, most standard homeowners insurance policies don’t have a tendency to cover damages caused by disasters such as earthquakes. This is regardless of the fact that you might reside in high-risk areas. Instead, they offer it through a separate policy.

For example, if you live in California, this will be presented to you by an insurance professional within the California Earthquake Authority. Also, there’s a limit on the replacement cost value on this; and it’s main goal is to put the roof back over your head, not replace everything you lost.

Flood Insurance

Home insurance companies do not offer flood insurance, despite that, according to the Insurance Industry, more than 90% of U.S. natural catastrophes involve some type of flooding.

The fact that neither homeowners insurance or renters insurance cover flood accidents, you’ll have to purchase a separate flood insurance policy. The policy limits on this one are around $250,000 in terms of home structure, and up to $100,000 for personal belongings.

Umbrella Insurance

We’ve already glanced at this type of insurance coverage earlier. And as we said, this policy helps if you didn’t purchase enough liability insurance. It covers legal defense costs, for example.

Suppose that the court finds you guilty after someone got injured on your property, and orders you to pay $400,000 for the injuries caused. However, you only purchased a homeowners insurance policy with $200,000 worth of personal damages. The umbrella policy acts as an extended replacement coverage.

Lack of Maintenance Damage

Although homeowners insurance policies provide protection from damage, they do not help you cover for normal wear and tear that can occur on the property. Keeping your home in good-standing and maintaining it is supposed to be a liability that does not require purchasing insurance.

Sewer Backup

The thing with sewer backup is that, although it is clearly not a part of your typical homeowners insurance, your insurance agent can sell you a sewer backup endorsement.

According to the Insurance Information Institute, the limit on this endorsement can be anywhere from $5,000 to $25,000 – all for the purpose of preventing structural damage.

For minimizing the actual cash value on this, you should talk to your local real estate agent prior to buying your home and do precautionary checks of the property.

Sinkhole Coverage

Although sinkhole disasters are common for on the U.S. territory, they are not incorporated in your standard homeowners insurance policy. As much as $100,00 would be considered purchasing enough coverage if you want to protect your property from this natural hazard.

Aggressive Dog Breeds

Injuries that arise from owning aggressive dog breeds are not covered by homeowners insurance. This includes medical payments for the injured party. Dog breeds that fall under this category are Terriers, Pit bulls, German Shepherds, etc.

The Pros of Purchasing Homeowners Insurance?

Purchasing this type of coverage carries certain advantages for the policyholder, and they’re definitely worth mentioning.

The most noteworthy advantage to purchasing homeowners insurance is that it protects the main building, that is, the part where you spend your day-to-day activities. Next, areas not directly related to the interior of your home, such as garage, pool, and front deck are also covered within the policy.

It’s also important to mention that this coverage can help the policyholder in case they find themselves in a legal dispute, having to cash-out large sums of money. And although some might think that purchasing homeowners insurance policies might be costly, once you re-think the possible instances, you will surely come to a conclusion that it’s a well-thought-out investment.

How Much Homeowners Insurance Do I Need: Conclusion

Although local regulations and governments do not require homeowners to carry homeowners insurance, they should purchase it anyway, and protect their most valued asset – their home.

The four levels of homeowners insurance consist of: liability coverage, dwelling coverage, personal property coverage, and other living expenses coverage. This insurance policy does not cover flood and earthquake hazards, injuries that result from aggressive dog breeds, and so on.

Before buying homeowners insurance, you should have an estimate of how much coverage you need, choose the deductibles, take into account your home’s condition, consider extra covers (an umbrella insurance, for example), and finally compare quotes and inquire about discounts.

If you’re a homeowner, you should definitely consider purchasing this policy. It does not only protect the main property of your house – it’s main structure and close surroundings – but it also helps you pay off legal costs, in case you’re found guilty for causing damage to the injured party.

Determining how much home insurance you need is a crucial step in safeguarding your most significant investment. At Insurance Geek, we understand that every home and homeowner is unique. Our insurtech tools and expertise simplify this process. Whether you’re a first-time homeowner or looking to update your coverage, we’ve got you covered.

Get a quote today and shop your coverage today, and let us help you find the perfect balance of coverage to protect your home and your peace of mind.