How Much Coverage Do I Need?

How Much Homeowners Coverage is Needed?

When you purchase a home, one of the most important steps you can take is to secure a homeowners insurance policy to protect your new investment. However, many people struggle to figure out how much coverage they should obtain. If you buy too much coverage, you’ll unnecessarily sink extra money into an insurance policy you don’t need. If you don’t buy enough, you run the risk of having to cover some of the costs yourself if you need to rebuild your home or replace your property.

Determining how much homeowners coverage you need isn’t always easy. You need to consider the replacement costs of your home and all of your possessions. You also have to figure out how much liability coverage you require. If you live in an area with lots of risk factors — such as frequent extreme weather events — you may also want to acquire additional living expenses coverage.

When shopping for homeowners insurance, there are several key steps you should take to make sure you purchase the correct amount of coverage. Let’s walk through these steps and discuss the details of each one to help you determine how much homeowners coverage you need.

Determine How Much It Would Cost to Rebuild Your Home

The portion of your homeowners insurance policy that covers the structure of your house itself is called “dwelling coverage.” This form of coverage provides funds to rebuild your house if it burns down in a wildfire or gets destroyed by a tornado. Dwelling coverage protects not only your home’s structure, but also any attached structures. If you have an attached garage, a wraparound porch, or a front stoop sitting area, dwelling coverage protects these elements.

A general rule of thumb regarding dwelling coverage is to purchase enough to entirely replace your home, not just enough to cover your purchase price. In other words, you should pursue coverage for the replacement cost value (RCV) of your home rather than the actual cash value (ACV). To determine your home’s RCV, you should first come up with your own rough estimate of how much it would cost to replace it. Consult with construction companies in your region (or ask your insurance agent) to get an idea of how high construction costs in your area are.

Then, you can use these rates multiplied by the square footage of your home to create an estimate. You can also utilize an online home replacement cost calculator. In general, the average cost of new home construction in the United States today is about $114 per square foot, according to the National Association of Home Builders. However, this rate can vary significantly depending on your state and locality.

Once you have a rough estimate in mind, you should seek professional opinions. The easiest way to do this is to ask several independent insurance agents. They will be highly familiar with construction costs in your neighborhood and can help you verify if your personal estimate is on the right track.

Do a Walkthrough of Your Home to Evaluate Your Possessions

Personal property coverage is another significant portion of a homeowners insurance policy. As the name implies, this is the coverage that protects your possessions. This includes everything you keep in your home: furnishings, kitchen appliances, electronic devices, clothing, sporting goods, etc.

The best way to determine how much personal property coverage you need is to do a comprehensive walkthrough of your home. Make your way through your home one room at a time, opening every drawer and every closet, taking notes of every item you find. For expensive items — like your big-screen TV or your Stratocaster guitar — you should also take pictures and record their serial numbers.

The process of doing a complete walkthrough can be highly time-consuming. Still, you shouldn’t give into the temptation to cut corners or skip a room here and there. In the long run, trading an afternoon of inventorying your possessions for the potential cost to replace those items is a no-brainer.

If you own any high-value or rare items, you will likely need to purchase an additional rider to cover them. For instance, most insurers offer special coverage for jewelry, watches, high-end electronics, bicycles, vintage musical instruments, furs, and more. When doing your walkthrough, keep the limits of your personal property coverage in mind and make note of any items that exceed those limits.

Assess Your Liabilities

Liability insurance is the third major component of a homeowners insurance package. This is the coverage that provides money for risks like third-party injuries or property damage at your home. Most commonly, liability issues covered by homeowners insurance include slip-and-fall accidents or dog bites. If someone visiting your home suffers injuries that require medical attention, your homeowners coverage will take care of the bill.

Some people think that they don’t really need liability coverage. After all, nobody ever expects that their friends and family would sue them if they injure themselves in your home, right? First off, you should never tether your financial wellbeing to assumptions about others — you never know when your mother-in-law might blame you for that dog bite she got from Fido.

Secondly, this coverage protects you from a wide range of third-party lawsuits. Keep in mind that it’s not just your friends and family visiting your home. At any given time, people like the mail carrier, UPS/FedEx/Amazon delivery drivers, the plumber, the gardener, or the handyman might be in or around your home. If any of these people becomes injured on your property, you will want sufficient liability insurance to protect your investment.

The amount of homeowners liability coverage to purchase is up to you, although the vast majority of insurers require you to purchase at least $100,000 in liability insurance. Many industry experts advise buying as much liability coverage as you can reasonably afford — $300,000 or even $500,000 are oft-recommended amounts.

The reason for this is twofold. Medical costs for even simple injuries can spiral out of control in a big hurry in America, so getting as much coverage as you can is always a good idea. Additionally, liability coverage is relatively inexpensive, so increasing your limits might not cost as much as you think it will.

Before we move on, it’s important to point out that homeowners insurance policies specifically exclude several types of dog breeds. If you own a dog that’s considered to be a high-risk animal by your insurer, your insurance company will refuse coverage for incidents related to the animal. The exact list varies by provider, so you should check with your insurer to see if they will cover your dog for liability purposes. For the most part, excluded dog breeds include Dobermans, Rottweilers, pit bulls, Great Danes, German Shepherds, Chow Chows, Huskies, and Malamutes.

Consider Additional Living Expenses Coverage

Dwelling coverage, personal property coverage, and liability coverage are the three core components of the typical homeowners insurance policy. However, there are other coverages that you may be interested in including. One common form of add-on coverage is additional living expenses coverage, or ALE.

ALE coverage provides funds to cover your added cost-of-living expenses if your home is uninhabitable due to a covered peril. For instance, if a tornado or wildfire demolishes your home, it will take a long time to repair or rebuild it. In some cases, it could take many months. While the construction crews work on restoring your home, you will need somewhere to stay.

This is where ALE coverage comes in. With the proper amount of ALE insurance, your insurer will reimburse the additional expenses of living elsewhere. This includes the cost of a hotel or apartment, and it can also help with things like food costs. For example, suppose you typically spend $300 per month on food, but a covered peril destroys your house and makes your kitchen unusable. In this situation, the insurance company will cover the additional amount of money (beyond that initial $300) it costs to swap out your home-cooked meals for takeout. However, it does not cover all of your food-related expenses. Only the amount that exceeds your typical costs will be reimbursed, hence the term “additional” living expenses.

How much additional living expenses coverage should you purchase for your home? Typically, insurers will derive your ALE coverage levels as a percentage of your dwelling coverage. Therefore, if you have $300,000 in dwelling coverage, your insurer will likely recommend ALE coverage ranging from roughly $60,000 to $90,000. If you want more or less coverage than your insurance provider suggests, discuss with them the effect this would have on your total costs.

Other Coverage Options

Do you live in an area that’s prone to earthquakes? If so, you can buy an earthquake endorsement as an add-on coverage for your homeowners insurance. Some people are surprised to hear that a standard homeowners insurance policy includes zero earthquake coverage. However, California is the only state that even requires homeowners insurers to offer earthquake insurance. Therefore, your current insurance company may not offer this type of coverage at all.

Homeowners insurance also includes no coverage for floods. In fact, traditional insurance providers do not sell flood coverage. The only way to purchase flood insurance in the United States today is to buy it from the National Flood Insurance Program (NFIP), an entity operated by the federal government. Some insurers also exclude water damage due to sump pump backup and sewer system overflow. If you’re concerned about these perils, you can add an endorsement to secure coverage.

Another endorsement that’s considerably less common is war risk coverage. As you might imagine, this covers losses resulting from war, terrorism, riots, insurrections, and invasions. If you’re especially concerned about these possibilities, ask your insurer to add war risk insurance to your homeowners policy.

Finally, homeowners insurance is one of several coverage types that can include identity theft protection. Again, this coverage is not included in a standard homeowners policy, but it can be a smart addition if you’re concerned about your personal information being stolen and used by criminals. Identity theft coverage is usually inexpensive (typically around $25 per year) and it can provide a significant amount of peace of mind.

In Conclusion

Purchasing homeowners insurance is arguably the most important step after you decide to buy a home. However, there are several factors involved that affect how much homeowners coverage you should acquire. For the most part, dwelling coverage is the most straightforward of these coverages, as it’s not too difficult to determine the value of your home or the cost to rebuild.

However, personal property and additional living expenses coverage can be tougher to figure out. Furthermore, when it comes to specialty coverages like earthquake, flood, war risk, and identity theft, it’s sometimes unclear whether you should purchase them in the first place.

If you have any questions or concerns throughout the homeowners insurance purchasing process, speak with an independent insurance agent. These agents aren’t tied to any one specific insurer, so they are entirely dedicated to helping you get the right coverage for your needs. Of course, they’re still trying to sell you insurance at some point, but they’re not beholden to one company. These professionals have broad knowledge about the different coverage types and which companies you should buy them from.

Some homebuyers overlook the crucial step of purchasing a homeowners insurance policy that’s specifically tailored to their needs and risk factors. Keep in mind that if you don’t buy enough coverage, you’ll have to pay out-of-pocket for any losses exceeding your limits. Similarly, if you purchase too much homeowners coverage, you’ll pay for insurance that you can’t even use.

Buying a new home is the most significant investment most people will make in their lifetimes. By protecting your investment with the appropriate amount of homeowners coverage, you can rest assured that your home is financially safe and secure.

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