How much homeowners insurance do I need?

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Chances are, your house is your most valuable asset. To protect it, you need to have a comprehensive homeowners insurance policy. But buying homeowners insurance goes beyond paying repair and replacement costs – it also protects your savings and investments.

Chances are your house is your most valuable asset. To protect it, you likely want to have a homeowners insurance policy. But buying homeowners insurance goes beyond paying repair and replacement costs — it also protects your savings and investments.

Although local and state governments do not require you to carry homeowners insurance, mortgage lenders usually do. In fact, most lenders specify the amount of insurance a homeowner must carry, typically throughout the life of the loan. But mortgage companies only consider the amount of insurance needed to cover their investment. Lenders typically have no regulations regarding other aspects of your homeowners policy, such as your personal property or liability coverages. That is why having enough insurance coverage across the board is important. But if it is your first time purchasing homeowners insurance, the process can seem daunting.

Before you buy a policy, you need to determine what type of coverage you need, how much coverage you need and which company is the best. Luckily, finding the coverage you need is as easy as following a few simple guidelines.

What is homeowners insurance?

The term “homeowners policy” typically refers to a set of coverages that protect your house, its contents and other associated structures. Your insurance agent can help you determine how much coverage you need.

Homeowners policies can include:

  • Dwelling coverage: Dwelling coverage is the primary homeowners insurance coverage. It covers your house and attached structures, like a garage.
  • Other structures coverage: Other structures coverage covers unattached structures on your property such as a detached garage, shed or fence.
  • Personal property coverage: This section of your homeowners policy covers the contents of your home, such as furniture and clothing.
  • Additional living expenses coverage: This coverage can pay some or all your living expenses if you are displaced from your home following a covered claim. For example, if a fire renders your home uninhabitable, your additional living expenses coverage may pay to rent a home temporarily while your house is under repair.
  • Personal liability coverage: Personal liability coverage helps pay claims when someone sustains an injury in your house or on your property. For instance, if a child falls from a tree in your yard, your personal liability policy could help pay legal fees following a lawsuit.
  • Medical payments coverage: If a guest sustains an injury in your home or on your property and you are not legally liable, your medical payments coverage can still help pay medical expenses.

What standard homeowners insurance does not cover:

During the course of being a homeowner, several mishaps could befall your house and a home insurance policy does not cover all of them. For the damages not covered by a standard home insurance policy, you may want to consider purchasing additional coverage. A typical home insurance policy includes exclusions for some risks. Because of that, you may want to consider the following coverage:

  • Flood insurance: Flood insurance pays for damages and losses caused by floods. Most homeowners policies do not include flood coverage and most insurance companies do not have flood coverage. Many homeowners purchase flood insurance through the National Flood Insurance Program, administered by the Federal Emergency Management Agency, but some private carriers also offer flood policies.
  • Earthquake insurance: Most homeowners policies do not cover damages or losses caused by earthquakes. However, many insurance companies offer separate policies or endorsements for earthquake damage.
  • Umbrella insurance: Umbrella policies help pay liability claims after your personal liability insurance reaches its limit. For example, if a court awards an injured person $500,000 after sustaining an injury on your property and the liability limit on your home is only $300,000, your umbrella policy could pay the difference up to the umbrella policy limit.
  • Lack of maintenance damage: Normal wear and tear of property and preventable damages are not covered by a homeowners insurance policy. Keeping your home in good condition can help mitigate this kind of damage.
  • Sewer backup: Although sewer backup is not part of a standard home insurance policy, it can usually be purchased as an endorsement. It is also important to perform preventative checks to protect your house from backed-up pipes.
  • Priceless jewelry and antiques: While coverage for valuables like jewelry and art can be purchased as an add-on to an existing home insurance policy, items such as family heirlooms are often considered priceless by homeowners. As a preventative measure, it is recommended to store these items in a place that is safe from theft or damage.
  • Aggressive dog breeds: Liability issues arising from the ownership of certain breeds of dogs such as pit bulls, German Shepherds or Rottweilers are often not covered by home insurance. If you have a dog, let your insurance company know. If they exclude coverage for your dog’s breed, it may be prudent to seek out a company that does offer coverage.

How much homeowners insurance do I need?

The amount of coverage each homeowner needs will vary significantly based on their unique circumstances. Your agent will help you calculate your home’s value to use as the Dwelling coverage amount. In general, homeowners insurance policies are written with secondary coverages calculated as a percentage of the Dwelling coverage amount. For example, the Other Structures coverage is typically automatically 10% to 20% of the Dwelling coverage value. For a $250,000 home, the Other Structures coverage would typically be $25,000 to $50,000.

Here are some tips you can use to determine the amount and types of homeowners insurance you need:

Know the difference between actual value and replacement cost

Your property depreciates over time. If it is destroyed in a covered catastrophe and has to be rebuilt, your insurance policy may cover either the actual cash value (which is the depreciated value of the property) or pay you the full replacement cost. A standard home insurance policy may not always offer replacement cost coverage but you may be able to purchase it as an endorsement.

Typically, there is a certain limit to replacement cost value, and if rebuilding your house costs more than the limit, you may have to pay out of pocket. This is when two more options come into play: extended replacement cost value and guaranteed replacement cost value.

Extended replacement coverage pays to rebuild your house to its prior state even if the price exceeds the actual cash value of the property. There is a limit, but it is typically 50% more than the coverage amount.

Guaranteed replacement coverage pays to restore your property regardless of the rebuilding costs. Many companies will have an upper limit after which they will not offer guaranteed replacement cost. For example, some companies will not offer a guaranteed replacement cost option on million-dollar homes.

Different methods of calculating your home’s value can produce different results. A government property assessor might assign a lower value to your home than a real estate agent. But you must look beyond your home’s market value to decide how much dwelling insurance to purchase. For example, if you have an older home, with plaster walls and custom-made trim, you may need to hire specialists to repair damage sustained by a fire. Likewise, if you equip your kitchen with expensive industrial appliances, those features should be taken into consideration when generating your coverage amount.

If you need help determining your home’s replacement value, your insurance agent can help. Most insurance companies offer tools to help calculate this value for policyholders.

Consider local building costs

You purchase homeowners insurance to prepare for damage or loss, so you must know how much repairing or replacing your house will cost. Research how much building supplies and labor will cost to restore your house to its current state or build an equivalent new home. Factors that impact the amount of coverage your house needs include the number of bathrooms it has, the materials used in its construction and its special features. For instance, if your living room features imported custom tiling, you might need higher coverage levels to protect it.

Consider how you use your house and who uses it

How you use your home can help you determine the amount of personal liability, medical payments and umbrella insurance you need. For example, if you often host parties and get-togethers for friends and family, you may want to consider a higher liability limit and umbrella coverage to protect you in case someone is injured as a result of your negligence. If you have a swingset, you may want to increase your medical payments coverage in case a neighbor’s child falls and hurts themselves.

Research rental rates in your area

If your home sustains major damage, you could spend weeks or months living in temporary housing while workers repair it. Find out how much it will cost for you and your family to rent a home or apartment in your area. Homeowners who live in expensive housing markets, such as San Francisco or New York City, may need more additional living expenses coverage.

Protect your personal belongings

If you need to file a claim for damage to your personal property, it can be helpful to have a home inventory list. This includes:

  • Name and description of items
  • Purchase cost or actual cash value
  • Date and place of purchase
  • Receipts or photos if available
  • Estimated replacement cost

Making a digital inventory list can help make the claim process smoother. The list should have everything that you consider valuable, including electronics, cash, jewelry and furniture. You can include photos and receipts, if you have them. Consider using cloud storage for the list or store it at another location like your office or a family member’s house. That way, if you do sustain damage to your home, the list will not be damaged as well. You can also ask your insurance provider for recommendations for inventory apps to make the process easier.

Determining the value and replacement cost of your belongings takes time and should be given the proper thought. You can replace items such as modern sofas and coffee tables with relative ease, but possessions such as paintings and family heirlooms are often irreplaceable. Homeowners insurance policies frequently have set limits on the amount of included coverage for individual items such as computers and artwork. If you own a lot of valuable items, you might consider increasing your policy’s limits or purchasing additional coverage for specific possessions.

Requesting homeowners insurance quotes

After you have determined how much homeowners insurance coverage you need, it is time to start looking at providers and getting quotes. We recommend checking out this list of the best homeowners insurance companies as a starting point.

As of 2020, the average annual premium for homeowners insurance is $1,477 for a dwelling coverage amount of $250,000. Please note that the cost will vary from one insurer to another and also by location and type of coverage chosen.

Most major insurance companies have an online quote tool that generates a price estimate based on information about you and your home. However, you can also call an agent and get a quote over the phone, which might be more accurate.

When shopping for home insurance, it is a good idea to get several quotes from different providers. That way, you can easily determine which provider can give you the best deal for the amount of coverage you need.

Methodology

Bankrate utilizes Quadrant Information Services to analyze rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Quoted rates are based on 40-year-old male and female homeowners with a clean claim history, good credit and the following coverage limits:

  • Coverage A, Dwelling: $250,000
  • Coverage B, Other Structures: $25,000
  • Coverage C, Personal Property: $125,000
  • Coverage D, Loss of Use: $50,000
  • Coverage E, Liability: $300,000
  • Coverage F, Medical Payments: $1,000

The homeowners also have a $1,000 deductible and a separate wind and hail deductible (if required).

These are sample rates and should be used for comparative purposes only. Your quotes may be different.

Rates are determined based on 2020 Quadrant Information Services data.

About the author


Cynthia Widmayer

Cynthia Widmayer

Cynthia Widmayer has over two years of experience as an insurance and personal finance writer. She covers home, car and life insurance products for Bankrate, the Simple Dollar, and Coverage.com, among others.

Written by
Cynthia Widmayer
Insurance Contributor
Cynthia Widmayer has over two years of experience as an insurance and personal finance writer. She covers home, car and life insurance products for Bankrate, the Simple Dollar, and Coverage.com, among others.