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Home insurance can protect your finances from costly and unexpected damages, but how much should you buy? Should you buy add-on coverage types, too? How do you know if you’ll be protected in the event that you have to file a claim? Bankrate’s insurance editorial team is here to help answer these questions. We break down the ins-and-outs of home insurance so you can feel more empowered to make smart financial choices with your own policy.

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How to determine how much homeowners insurance you need

If you find yourself wondering, “How much homeowners insurance do I need?” you aren’t alone. Determining the proper amount of coverage for your home insurance policy can be daunting. Rest assured — choosing home insurance coverage amounts is easier than you think. Keep in mind, though, that the coverage types and levels each homeowner needs will vary significantly based on their unique, personal situation.

Generally, home insurance companies have a tool that will calculate the rebuilding cost of your home based on details like the location and size of your home, interior finishes and any custom features. Once your dwelling amount — the amount of coverage you’ll need for the structure of your home — is determined, that number will serve as the basis for the levels of several other coverage types. For example, your personal property coverage is usually automatically between 50-70% of your dwelling amount. The same goes for your other structures coverage and loss of use coverage, for which coverage percentages are generally set automatically based on the amount of dwelling coverage you need. You can usually adjust the policy if you need more coverage, but the automatic levels serve as a starting point.

Know the difference between actual value and replacement cost

Home insurance policies have a few different ways of compensating you for damage: actual cash value and replacement cost value. You may have the option to choose between these settlement types, or you may automatically be given one or the other. Understanding them is important, though, as it can help you set realistic expectations should you need to file a claim.

Actual cash value, also called ACV, means that depreciation will be taken out of a claim settlement. For example, if you have ACV coverage for personal property and your 15-year-old television set is damaged in a covered loss, your home insurer will pay you the actual value of your television rather than what it would cost to buy a new one.

For more robust coverage, you may be able to choose replacement cost. This settlement type would pay you the cost to replace your television, even though a new TV likely costs more than what your 15-year-old one is worth. Both ACV and replacement cost can apply to your home’s structure or to your personal property, or both. If you aren’t sure what coverage is best for you or which settlement option is included in your existing policy, talk to your agent.

Consider local building costs

You purchase homeowners insurance to prepare for damage or loss, so you should know how much it will cost to repair or replace your house. 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, 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. Understanding these factors could help you decide if a company’s calculation of your home’s replacement value is too high or too low.

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 may 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 possibly even an umbrella policy to protect you in case someone is injured as a result of your negligence. If you have a swing set or pool (especially those with a diving board), you may want to increase your medical payments coverage — which pays for medical costs to guests up to your policy limit regardless of fault — in case a visiting 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 it’s repaired. Find out how much it will cost for you and your family to rent a home or apartment in your area, or live at a local hotel. Homeowners who live in expensive housing markets, such as San Francisco or New York City, may need more additional living expenses coverage — also called loss of use coverage — than what a standard policy includes.

Protect your personal belongings

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

  • Name and description of items
  • Purchase cost or actual cash value
  • Date and place of purchase and receipts, if available
  • Photos of each item
  • Estimated replacement cost

Having a digital home inventory can also help to make the claim process smoother. The list should have everything that you consider valuable, including electronics, cash, jewelry and furniture. Consider using online cloud storage for your inventory 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 home insurer for recommendations of 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 fine art and family heirlooms are often irreplaceable.

Homeowners insurance policies frequently have set limits on the amount of included coverage for individual items such as electronics 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 in the form of an endorsement or floater.

Factors that impact how much home coverage you need

When determining how much home insurance coverage to buy, you may want to consider a few different aspects of your situation:

  • Age of home: Older homes may need different coverage than newer homes due to features that are no longer common in modern buildings. For example, some older homes may have custom crown molding or intricate woodwork that needs higher coverage limits.
  • Home size: The size of your home is a significant factor in how much coverage you need. Generally, the bigger your home, the more costly it will be to repair or rebuild.
  • Code regulations: Older homes may have been built when building codes were different. This means that, if the home is damaged, it may need additional repairs to bring it up to current codes. This can add to the cost of a claim and means you may need more coverage.
  • Inflation: Many policies include a provision that automatically increases your coverage limits each year to keep up with inflation. However, when inflation rises rapidly, your current limits may not be sufficient to properly cover you, and you may need to adjust your policy.
  • Construction costs: Different areas of the country have different costs of living, and this affects construction material and labor costs as well. If you live in a pricey area, you may need extra coverage to protect your finances.
  • Your financial situation and risk tolerance level: If you have enough money saved to take care of damages out of pocket, or if you are comfortable with a higher level of risk, you may choose less coverage than someone in a different financial situation.
  • Your unique needs: Every homeowner has different needs and that could translate into needing specialized coverage. For example, if you own fine jewelry, you may want to add scheduled personal property coverage. Home insurance policies usually have several endorsements you can consider to build customized coverage.

What standard homeowners insurance does not cover

As a homeowner, several mishaps could impact your house. While home insurance can protect your finances against a variety of situations, a standard policy does not cover everything. In fact, there are several common home insurance exclusions. For the damages not covered by a standard policy, you may want to consider purchasing additional coverage, including:

  • Flood insurance: Standard homeowners policies do not include flood coverage. Generally, you will need to purchase a separate flood insurance policy for this coverage. Flood insurance is offered through the National Flood Insurance Program, administered by the Federal Emergency Management Agency, as well as some private insurers.
  • Earthquake insurance: Most homeowners insurance policies do not cover damages caused by earthquakes, even in high-risk areas. However, many home insurers offer separate policies or endorsements for earthquake damage. In California, this coverage is offered through the California Earthquake Authority.
  • Sinkhole coverage: Sinkholes occur in many regions of the U.S. but are not covered by a standard homeowners policy. Sinkholes can cause extensive damage to homes, so sinkhole coverage is important to have if your area is prone to this hazard.
  • Mine subsidence insurance: In some areas of the country, sinkhole-like damage can be caused when abandoned mines collapse. This is called mine subsidence, and you’ll need an endorsement on your home insurance policy in order for related damage to be covered.
  • Umbrella insurance: Umbrella policies can 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 coverage is not part of a standard home insurance policy, it can usually be purchased as an endorsement. Performing preventative checks to protect your house from backed-up pipes can also be helpful.
  • 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 with an endorsement or floater, 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: Home insurance policies often exclude liability coverage for injuries caused by certain dog breeds, such as pit bulls, German Shepherds or Rottweilers. 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 home insurer that offers coverage.

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