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

Determining the proper amount of coverage for your home insurance policy can be daunting. Rest assured — choosing home insurance coverage amounts may be easier than you think. Keep in mind, though, that the coverage types and levels each homeowner needs will vary significantly based on their unique 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 set automatically, typically between 50 percent to 70 percent 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.

Assess your home

The first step in choosing how much homeowners insurance you need is usually doing a full assessment of your home. Insurance companies have their own metrics for assessing your home’s value and potential risk, but as an owner, it’s generally a good idea to have an overview of your home and what you need covered before shopping around for quotes.

Some standard factors to take into consideration include the size, age, and features of your home, as well as the age of your roof. You may also want to do a full assessment of your valuables and who uses your home, factors we will go into in more detail below.

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, 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, it may be helpful to talk to your agent.

Insurance companies set sub-limits for certain types of personal property. For example, a policy with $100,000 in personal property coverage may only pay a maximum of $2,000 for jewelry losses. If you have expensive personal belongings, you may consider adding valuable items coverage or scheduled personal property coverage.

Research 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.

One aspect of building costs to consider is whether your home meets current building codes. Typically, homes that are not up to code cost more to rebuild. If your home does not meet current building codes, you may want to consider adding an ordinance or law endorsement to your home insurance policy. Following a covered loss, ordinance or law coverage can help pay for the additional costs of bringing your home up to code.

Consider how you use your home

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.

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. This is why it may be a good idea to 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.

Take stock of 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.

Factor in your personal finances

Personal finances are a typically key factor in determining how much you can afford to pay out of pocket to rebuild your home or replace personal belongings. Keep in mind that while most homeowners insurance policies include a provision that automatically increases your coverage limits each year to keep up with inflation, if inflation rises rapidly, your current limits may not be sufficient to properly cover you, and you may need to adjust your policy.

Most insurance experts agree that it is best to carry enough coverage to rebuild your dwelling and replace personal items. However, some homeowners have ample savings and may prefer to cover more costs out-of-pocket in case of damage to their home or property in exchange for lower rates on their insurance.

You can typically lower your home insurance rate by increasing your deductible. But be aware that if a disaster strikes, you will have to pay more using your own funds. It all comes down to risk. If you do not carry enough homeowners coverage, a major loss caused by a fire, storm or other event could severely impact your finances.

What is not covered in a standard homeowners insurance policy?

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 homeowners insurance 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 may 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.
  • Sewer backup coverage: 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 may also be helpful.
  • Priceless jewelry and antiques coverage: While coverage for valuables like jewelry and art is typically included in a standard homeowners policy, there are usually limits as to what an insurance company will pay out for these items in case of a covered peril. Homeowners with extensive collections of valuables may want to purchase additional add-on coverage to ensure their items are financially protected.
  • Aggressive dog breed insurance: 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.

Frequently asked questions

    • The average cost of home insurance in the U.S. is $1,383 per year for $250,000 in dwelling coverage, according to rates from Quadrant Information Services. However, rates may vary by a number of factors, including the state you live in, how much dwelling coverage you purchase and what optional coverage types you choose. Shopping around may help you find the cheapest home insurance policy for the coverage you need.Learn more: How to calculate your home insurance cost
    • You can often get home insurance quotes online, but talking to an agent by phone or in an office may be a better idea. That way, you can discuss your situation with a licensed professional and get some guidance on how much coverage to purchase, as well as what endorsements fit your situation. You’ll need your name, date of birth and possibly your Social Security number, as well as information about your house, including the year it was built and the age of the roof. It may be a good practice to compare home insurance quotes from several companies, so you can review each carrier’s rates, coverage choices, discounts and third-party scores.
    • The term “hazard insurance” refers to the part of your home insurance policy that covers your home’s structure. Hazard coverage can help pay to repair or replace your home if it sustains damage caused by a covered peril such as a fire or storm. Most standard home insurance policies do not cover losses caused by earthquakes or floods. However, some insurance companies offer earthquake and flood endorsements or standalone policies. You can also purchase flood insurance through the National Flood Insurance Program.
    • At the state level, homeowners are not required to buy home insurance. However, mortgage lenders almost always require you to purchase a policy as a condition of your loan. Typically, you’ll be required to show proof of a replacement cost policy or that you have enough coverage to pay off the balance of the loan. That way, if your home is destroyed and you choose not to rebuild, the mortgage company knows that your commitment to paying back your loan will be met.

      Most financial advisors encourage homeowners to purchase and maintain a home insurance policy even after they pay their home off. Home insurance can be an important part of your financial self-care practices, and it may shield your hard-earned wealth against devastating costs in the case of a covered peril.