How Much Homeowners Insurance Coverage Do You Need?

For most people, a home will be their largest asset. Homeowners insurance protects that investment. A recent Insurance Information Institute news release said that two-thirds of all homes in America were underinsured by an average of 27%. So it is important to be sure that you have the correct amount of coverage. You can determine if you are adequately covered by calling your current insurance provider to review your policy

Homeowners insurance insures the structure of your home against fire, theft or other accidental damage called insured perils. How much of this type of coverage do you need?

The quick answer to this question is: You need enough coverage to be able to afford the construction costs to totally rebuild your home. A simple way to estimate this is to multiply the square footage of your home by the local building cost per square foot. A local insurance agent or real estate agent can tell you the local building cost figure.

If you have a mortgage, your lender will advise you about how much of this type of coverage they require. However, the amount a lender requires is most likely not enough to totally rebuild your home, so you'll still want to do the estimating mentioned above.

Here is a hypothetical situation An average 1,268 square foot home in Nevada, built in 1997, currently has dwelling coverage of $81,000. Remember, the dwelling coverage is not what you bought the house for, but what the estimated rebuilding costs would be. If this homeowner found out they were underinsured by the average of 27%, and increased their coverage to $110,000, the monthly payment would only increase by about $7.50 a month. That extra $89 a year could be the difference of having partial replacement coverage and total replacement coverage.

Homeowners insurance also usually includes personal liability coverage. This can provide insurance coverage for certain legal expenses and medical costs, if someone is injured at your home. How much coverage do you need?

A standard homeowners policy typically includes $100,000 worth of liability coverage. But most insurance professionals and most mortgage lenders advise or require $300,000 to $500,000 in liability coverage. You can purchase an endorsement that is added to a standard homeowners policy for this extra amount.

If you have assets worth more than $300,000 to $500,000, you may also want to consider personal umbrella coverage. This insurance kicks in once your homeowners or automobile coverage is exhausted. It is extra protection that can be valuable.

Here's an example of how a personal umbrella policy works with a homeowners policy: While at your home, a guest is severely injured and sues you for $500,000. Your homeowners policy has a liability limit of $300,000. Once the home policy pays out $300,000 your coverage is exhausted and the personal umbrella coverage begins, paying the remaining $200,000. The typical cost of a $1 million personal umbrella can be as low as $150 to $200 annually. A relatively small investment for sound peace of mind.

How much coverage do you need to cover the loss of your personal belongings?

Depending on the value of your personal property and your individual financial circumstances, you can choose from one of three ways to cover your home's contents: guaranteed replacement cost, replacement cost or actual cash value.

Actual Cash Value -- Most homeowners policies pay to replace personal property using this method that is based on replacement cost of the property minus depreciation.


Replacement Cost -- Opting for this coverage means you receive today's cost for an item that is lost to a fire or other covered hazard up to a certain capped dollar amount. Though you will pay an additional premium for this option, it may be well worth the cost.


Guaranteed Replacement Cost -- This coverage means you there is no cap or maximum pay-out applied to coverage of your insured personal belongings. You will pay an additional premium, but you could consider increasing your deductible in order to make this coverage more affordable. For example, increasing your deductible from $500 to $1,000 could reduce your premiums.
Whether you choose replacement cost or actual cash value coverage for your personal items, it is a good idea to keep an inventory of the contents of your home. Videotape and photographs are excellent ways to document your possessions. Some people find that per-room lists are also helpful. Your inventory should be kept in a safe place, such as a safety deposit box.

You may also want to buy extra insurance for jewelry, silver, special computer equipment, artwork and other highly valuable belongings that may not be covered on the average homeowners policy. Amounts and types of extra insurance you might need varies widely depending on what you own.

Other things to consider when deciding how much homeowners insurance you need

Inflation Protection
You may want to consider inflation protection. This clause or endorsement annually adjusts your homeowners insurance policy to account for increases in rebuilding costs, as determined by the industry's inflation statistics, if there were a loss.

Levels of Protection for Your Home's Structure
Just like with your personal belongings, there are three levels of protection to choose from when insuring the structure of your home. The 3 most common levels of coverage are:

Actual Cash Value
Your house or property is covered for the depreciated amount of the replacement value at the time of loss.

Extended Replacement Cost
If your policy includes extended replacement cost, it is meant to cover you above the Coverage A amount on your policy (provided you have not reduced this coverage below the amount determined by your carrier). For example, assume the rebuilding cost of your home is determined to be $200,000 (the amount of your Coverage A) with an extended coverage amount totaling 250%. If you have a claim that pays out the total of your Coverage A, the additional 150% (ERC of 250% less the original 100% of Coverage A) would pay out up to an additional $300,000 if needed, extending the total replacement cost to $500,000.

Guaranteed Replacement
Although only a few companies even offer this coverage, guaranteed replacement cost coverage has no cap or maximum pay-out amount. For example, assume a home was originally worth $100,000. But over the years, the owner makes unique design, decorating and style changes that makes the home worth $250,000. If the home was destroyed in a fire guaranteed replacement coverage would enable the owner to restore the home to its $250,000 condition. This type of coverage may cost more, but it provides the most protection.

Whether you are in the market for a new policy or just considering if your coverage is adequate coverage, reviewing your policy annually is a good exercise to get in the habit doing.