As the cost of almost everything continues to rise these days, so does the risk of your home being underinsured. If you haven’t reviewed your homeowners insurance policy recently, now is a great time to make sure you have enough coverage to protect you and your property.
In this article, I’ll review six of the major categories of homeowners insurance coverage along with factors you should consider to determine whether you might benefit from additional coverage.
I’ve conducted research on factors to consider when calculating coverage, and I’ve compared standard coverage from several insurance companies.
How Much Homeowners Insurance Am I Required To Have?
Homeowners insurance is not required by any state or local laws. But if you have a mortgage, it’s likely that your lender requires you to have coverage.
The amount of coverage required will vary based on your lender and other factors such as the size, cost and location of your home, Typically, lenders will require coverage for the replacement value of your home at the time of purchase.
If you’re wondering whether you have enough homeowners insurance to protect your home and possessions, here are three questions to consider:
- What Does Homeowners Insurance Cover?
- How Do I Determine How Much Homeowners Insurance I Need?
- Should I Consider Additional Coverage for My Home?
Whether you’re reviewing your existing policy or you’re looking for coverage on a new home, you’ll find information below that should help you determine how much homeowners insurance you need.
What Does Homeowners Insurance Cover?
Homeowners insurance provides financial compensation for covered damages or losses. Most standard homeowners insurance policies will provide coverage in six key areas:
|Type of Coverage||What It Pays For|
|Dwelling||Repair/replacement because of damage to the physical structure of your home|
|Liability||Medical and/or legal fees if someone is injured (or something they own is damaged) and you are legally at fault|
|Loss of Use||Living expenses in the event that you’re not able to use your home|
|Medical Payments||Medical bills if someone gets hurt on your property even if you’re not at fault|
|Other Structures||Repair/replacement of structures separate from the main building on your property|
|Personal Property||Repair/replacement of property such as clothing, equipment or furniture in your home|
To review more details on the coverage offered, such as differences between liability coverage and coverage for medical payments, be sure to check out our breakdown of what homeowners insurance is here.
How Do I Determine How Much Homeowners Insurance I Need?
Being underinsured means your homeowners insurance policy won’t pay enough to rebuild, repair or replace your assets in the event of an unexpected disaster.
Money expert Clark Howard recommends that you review how much coverage you currently have, especially if you’ve lived in your home for more than five years.
The cost of rebuilding per square foot can be up to three times higher than the cost to buy a house in your current neighborhood per square foot.
The current market value of your home is not the same as the cost to rebuild it. Market value is how much your home would sell for. It depends on several factors including:
- Age and condition of the home
- Current supply and demand for homes in the marketplace
- Selling price of properties around the neighborhood
- Proximity of the home to schools, cities and other resources
The cost to rebuild your home is driven by factors such as:
- Property location
- Property age
- Materials used in structure construction
- Upgrades made to property
- Updates required by government ordinances/laws
Each of these factors impacts the overall cost of construction, which you can also expect to increase annually because of inflation. And it’s worth noting that labor costs will likely go up as well.
To determine the average cost of construction per square foot of a new home based on your location, I recommend using an online construction calculator. If you search for “local construction cost calculator,” you’ll find several free options.
For the most accurate estimate, you’ll want to find a site that calculates based on your ZIP code. There are many free calculators online, but some sites may require you to enter personal information before providing the estimate. Alternatively, you can call construction companies in your area to get an estimate on current construction costs.
Once you have an average cost per square foot, multiply it by the square footage of your property.
Here’s an example for Georgia residents, which I calculated in July 2022 using the Home Cost calculator:
|Average Cost |
per Sq. Ft.
|New Home |
|Estimated Cost To
|$136.93||2500 sq. ft.||$342,325|
After you’ve calculated the estimated cost to rebuild your home, you can determine how much dwelling coverage you want to buy based on how much you’d be able to pay out of pocket in the event of a disaster.
Consider, for example, dwelling insurance equal to 80% of the replacement cost of the home in the example above. This might seem sufficient, but 20% of the replacement cost for a $342,325 property is $68,465. That may be a good bit more than you’re comfortably able to pay out of pocket (in addition to the policy deductible).
With this in mind, having dwelling insurance equal to 100% of your home’s replacement cost is ideal. Whether it is required, however, will depend on your lender.
Liability insurance provides coverage in the event that you or a member of your family is deemed to be at fault for bodily injury or property damage to other people.
Typically, standard homeowners insurance policies will provide a minimum of $100,000 worth of liability coverage. It’s important to take stock of the value of your assets, such as your investments, property and savings, when determining if you need more coverage than the standard amount.
If you’re found legally responsible for bodily injury or property damage to another person, your assets may be at risk if the claim exceeds your coverage.
That’s why it’s important to know the value of all your assets, not just those related to your home. A good rule of thumb is to have coverage that matches your net worth in order to protect your assets fully. If the amount of coverage you need is more than your insurance company will offer, you can consider adding an umbrella policy to provide additional liability coverage.
Loss of Use
If you aren’t able to use your home or sections of your home due to damages, loss of use coverage will pay for you to live elsewhere while repairs are being made.
Typically, insurers will include loss of use coverage as a percentage of your total dwelling insurance. As an example, if you have dwelling coverage of $300,000, then a 20% loss of use coverage would amount to $60,000.
While 20% of dwelling coverage is standard for loss of use coverage, you might consider increasing this coverage based on your family’s size, average daily expenses and other financial factors specific to your family’s needs.
Standard homeowners insurance policies typically provide medical payment coverage for minor medical expenses. This coverage can be used when someone is injured on your property.
Unlike liability coverage, you don’t have to be deemed responsible for the injury in order to use this coverage. So, if a friend chips a tooth after slipping down your stairs, you can use medical payments coverage as a courtesy to help your friend with dental care. Medical payment coverage may even serve as a buffer to prevent being taken to court.
Most insurers have a coverage limit for medical payments between $1,000-$5,000 per claim.
As part of your homeowners insurance, certain fixtures that are separate from the main structure of your home can also be protected against covered damages or losses. Fixtures that fall into the category of other structures can include:
- Detached garages
Your coverage in this category will be based on your dwelling coverage, as insurers offer other structures coverage as a percentage of your total dwelling. The standard amount offered is 10%.
While most insurers allow you to decrease this percentage, they usually won’t let you increase this type of s coverage. Typically, in order to increase the coverage amount for other structures, you will have to also increase your dwelling insurance.
If you wanted to bump your other structures coverage from $30,000 to $35,000, you would need to increase your dwelling coverage to $350,000.
As with dwelling insurance, you should aim to have enough other structures coverage to rebuild any other structures on your property.
Determine what qualifies as other structures on your property based on your insurance policy, then determine how much it would cost to rebuild each of your qualifying structures.
Consider a fence as an example. Factors such as rising costs of material and labor should be taken into account when determining whether you have enough other structures coverage. It’s likely that the cost to rebuild today will be higher than the cost when those other structures were initially built on your property.
The first step to determining how much personal property coverage you need is to inventory everything in your home. Personal property insurance reimburses you for the cost of repairing or replacing your belongings if they get damaged, destroyed or stolen.
Once you’ve taken stock of what you have in your home, it’s important to understand that your possessions can be assessed on either their actual cash value (ACV) or the replacement cost value (RCV).
The actual cash value of an item is what you could sell it for today. Depreciation is factored into an item’s actual cash value. The replacement cost value is how much an item would cost to replace, an item.
Think of a piece of furniture in your home, such as a bed or couch. Let’s say you paid $2,000 for that item brand new. But if you were to sell it today, you’d get just $1,500 now. That’s the ACV. RCV, the amount to replace what you originally purchased, would be $2,000.
Personal property coverage is typically calculated as a percentage of your total dwelling insurance, with actual cash value coverage being the standard. Most insurance companies will allow you to upgrade to replacement cost value coverage for a higher premium.
To make sure you have adequate coverage, you need to take the time to calculate the value of your personal property. Clark recommends doing this annually. He suggests making a video of everything you own, perhaps on your birthday or when the time changes from daylight to standard time.
“Having a video is key to dealing with the insurance company following a tragic loss of possessions or your home.
“And the video doesn’t take that long. You’re talking about 10 minutes or less, once a year, to update the walk and talk and say, ‘Oh yeah, I got that at Target, and it cost this much. And I got that at Sam’s Club, and I got this at blah, blah, blah.’
“Having those possessions electronic record of them is great — particularly in the trauma you’re feeling after you lose the possessions in your home.”
Once you have your inventory, determine whether you want actual cash value coverage or replacement cost value coverage. Remember, the actual cash value will provide less coverage for repair or replacement of items but will typically result in your premium being lower. Valuing your personal property at replacement cost will provide more coverage for your belongings but will come with a higher premium.
Should I Consider Additional Coverage for My Home?
If you determine that you need more than standard coverage to protect your property and belongings fully, you may need to consider adding what are known as “endorsements” to your existing insurance coverage.
An endorsement can include additions, removals, exclusions or other changes to a standard policy.
To determine whether you need additional coverage, you should first understand what your policy covers and what is excluded.
Common types of endorsements for homeowners insurance include:
- Earthquake coverage
- Extended replacement cost
- Flood coverage
- Umbrella insurance
Tips for Increasing Coverage With Minimal Impact on Your Premium
If you’re underinsured or would simply like more coverage, but are hesitant to increase your premium, here are a few tips to consider:
- Avoid filing small claims. Minor claims can have major impacts on your premium. In fact, you can expect your homeowners insurance premium to increase with every claim you file. Insurers keep track of your claim history to calculate how likely you will be to file a claim in the future. Based on the likelihood of future claims, insurers raise your premium to minimize their losses.
- Increase your deductible. Raising the amount you have to pay before your insurance company provides coverage can save you money on your premium.
- Consider bundling your policies. Many insurance companies offer discounts to customers who buy multiple policies. If you have homeowners and auto insurance through the same company, you might get a better rate than if you have those policies with two different companies.
Unless you’ve recently taken stock of your home and belongings, given the rising cost of almost everything, there’s a good chance that you’re underinsured. And that could be disastrous in the event of what Clark calls a major “oops” in life.
Even though most lenders require you to purchase homeowners insurance, they typically require just enough coverage to protect themselves. As the costs of labor and materials to build a home increases year after year, it’s important to ensure that you maintain enough homeowners insurance to protect yourself.
Calculate the cost to rebuild your home, then take stock of your belongings and determine whether it makes more sense for you to value your possessions at their actual cash value or replacement cost value. Once you know the cost to rebuild, repair or replace, compare your calculations to your current policy and make adjustments as needed and where possible.
Then, choose a date you’ll remember and review your coverage annually. And while Clark’s all about saving money, in this case, he thinks you shouldn’t scrimp.
“I’d rather you err on the side of having too much to fix and repair and rebuild your home than too little.”