The average homeowner carries enough insurance to completely cover their home being rebuilt, property replaced, and any costs if their home is temporarily unlivable. Like any insurance case, the appropriate amount of coverage is preparing for the worst-case scenario of home structure damage.
In fact, not buying or having enough homeowners insurance is one of the biggest problems homeowners run into. It’s common for someone to be on the line for remaining payments that go toward fixing their house after their insurance only covers a portion. At the same time, there is also the question of what their homeowners policy covers.
Naturally, damage caused by fire, lightning, or hail is covered by the average homeowner policy, while more specific natural disasters like flooding and wildfires are included in more specific policies. So, it isn’t just a question of how much homeowners insurance you will need, but what kind of homeowners policies as well. In this post, all your questions about how much and what kind of homeowner insurance you will need will be answered. Follow along below for tips and tricks for getting cheap homeowners insurance quotes.
How Can I Tell How Much Homeowners Insurance I Need?
The process of finding how much homeowners insurance you need involves inventorying your property, researching municipal building codes, cataloging your home’s area, and keeping track of any major renovations. We’ll talk about these specifically and how to go about it later in the post -doing all that is necessary to measure how much homeowners insurance you need and what additional policies are right for you.
Adequate homeowners insurance coverage usually follow the “four Rs,” so you’ll have enough coverage to:
- Rebuild your home.
- Replace your property and belongings inside your home.
- Repay any medical expenses for injuries sustained in your home.
- Reimburse living expenses should your home be temporarily unlivable.
What Are The Different Homeowners Insurance Policies?
You won’t be able to gauge how much homeowners insurance you will need without knowing the different policies and the coverage they provide. Homeowners insurance is actually comprised of different coverage types, with some often being required and others as optional add-ons.
The insurance coverages that makeup homeowners insurance are:
- Dwelling insurance - This is often the coverage most refer to as standard homeowners insurance and is required. Dwelling insurance provides coverage from natural disasters, storm damage, criminal activity like vandalism and theft, and instances of collateral damage. Some state-specific disasters like hurricanes, earthquakes, and floods may not be covered by dwelling coverage.
- Liability insurance - Another required form of homeowners insurance is liability insurance which covers you if someone is injured at your home. Liability coverage can also be increased to what is known as an umbrella policy, which usually works better for individuals with high net worth. Liability insurance also covers domestic dog bites but only for specific breeds. Breeds like pit bulls, pinschers, great danes, and german shepherds are breeds that insurance providers label high-risk and uninsurable.
- Personal property insurance - After inventorying such things as electronics, jewelry, furniture, and other belongings of value, you may be motivated to take out an insurance policy on them as well with personal property coverage. If any of these are damaged or lost, they would be covered under this policy. Extended coverage may be covered for high-end items of vast value.
- Other structure protection - Many homeowners with detached garages or storage houses opt for other structure insurance, which covers all other structures separate from the house on the property.
- Additional living expense coverage - If you temporarily relocate while your home is under construction or repairs, staying in temporary lodgings like a hotel may yield high costs. Additional living coverage reimburses the policyholder for any expense while waiting for their home to be habitable again.
- Umbrella insurance policy - An umbrella policy can be added to home and auto policies to cover an extra value of personal property. In addition to providing replacement protection, there is also vast legal protection that comes with an umbrella policy.
What Levels of Coverage is There for Homeowners Insurance?
There are still a couple more terms of homeowners insurance to be aware of before making any measurements -three to be exact. Each one refers to a value or costs the insurance providers look at when it comes to homeowners insurance.
The three coverage types are:
- Actual cash value - Refers to the cost of your home and the belongings within. To get the value, the depreciation is from the amount you paid initially. This should add (or subtract) up to the current value of your home and property.
- Replacement cost - Refers to the cost of replacing or repairing your home, which is the actual cash value but with the depreciation added this time. Some insurance companies may offer extended replacement which offers higher coverage limits.
- Guaranteed/extended replacement cost - Previously mentioned, a guaranteed or extended replacement is depreciation-free and pays for whatever the cost is to repair or replace your home. This is an excellent investment if your policy limits aren’t high enough to cover expenses.
How do I Calculate Replacement Cost?
Now that all the terminology is taken care of, it’s time to calculate how much homeowners insurance you will need. The first step is always finding your replacement value.
You don’t have to be a mathematician to do so with the following steps:
- Step one - Record the square footage of your home and multiply it by your town’s construction costs. These costs are usually listed on construction companies’ websites as they regularly have to contend with them. Insurance agents will also have knowledge of such.
- Step two - Consult an online calculator to ensure that you manually calculated a reliable amount. Online calculators include more factors beyond square footage like building materials and the number of rooms in the house.
- Step three - Ask a professional or insurance agent for an estimate of the replacement cost to compare to your own. With the correct calculations, you and the insurance agent will have estimates in the same range. Insurance agents working with local rather than national brands tend to give more exact quotes.
What Can Affect Replacement Cost?
The reasons why replacement costs differ among homes can depend on some construction circumstances.
There are typically five main factors that can determine the replacement cost:
- New building codes - Building codes may have changed since your house was constructed. If it has to be rebuilt, repaired, or renovated, it must meet the standard of new codes. This can result in added safety feature fees. Ask your insurance provider if they offer building code coverage to alleviate some of the costs.
- Renovated kitchen - Most notably, renovated and remodeled kitchens cause the most change in a home’s value heavily. It all depends on what material is used for countertops, new appliances, stainless steel textures, and plumbing. Complete records of recent renovations should be provided.
- New rooms and add-ons - Added space like room space, a garage, or detached structures will add value to a home. Your homeowners insurance policy should be updated to include any new structure features.
- Building and construction costs - There isn’t just the cost of construction services to consider; there is also the question of material costs. Bricks, timber, and stone prices tend to fluctuate as well. These costs are never constant and ever-changing, which it helps to be mindful of.
- Older, more complex to fix features - Building styles and methods are other aspects of replacement cost that can change. So, a home may have certain architectural features that may be charged higher than usual due to the craftsmanship.
How Much Dwelling Insurance Should I Carry?
First and foremost is to have insurance for your home and its structure(s). You should always carry at least the minimum replacement cost in dwelling insurance. At this point in the reading, you’re aware of how to find replacement cost and what affects it. Dwelling insurance is usually the first kind of homeowners insurance a new policyholder will buy. An insurance agent at any given company will provide you with a recommended coverage limit based on your home’s replacement value, but it never hurts to do your own research. Again, you should be aware of your home’s local construction costs, style, building materials, number of rooms, property square footage, and renovation history. Based on your property, you may need to invest in other structure protection if you have something like a detached garage. Remember to use all the mentioned factors to gauge how much insurance you will need. One of the worst situations is not having enough dwelling insurance during a rebuild or renovation. The financial damage that can cause is severe.
How Much Liability Insurance Should I Carry?
With your costs in mind, it’s time to determine how much liability coverage you carry with your homeowners insurance. Vehicle and business owners are also required to carry liability insurance. Its purpose has always been to cover the policyholder if anyone is injured on or by their property. These can often result in medical bills and legal fees that can be a financial burden. Many states set their liability insurance limit at $100,000. But many homeowners buy anywhere from $300,000 to $500,000 to be prepared for anything. A good rule of thumb for liability insurance is to buy as much as you can afford.
How Much Personal Property Insurance Should I Carry?
Now it’s time to think about your personal property within your home or your stuff in layman’s terms. This can include home essentials like furniture and appliances. Everything within your living and kitchen can be covered with property insurance. In addition to electronics and equipment, articles as personal as clothes are also covered in a personal property policy. Destruction, theft, and vandalism are all methods of damage or loss which are covered as well. Every big and little thing you own counts. Ideally, you’ll carry enough personal property insurance to replace at least 90% of your belongings. Or, at the very least, enough to get back on your feet from a significant loss of property.
A good way is to take inventory in every room of your house and document it with pictures and lists. The value you assign to them can be estimated based on how much they were originally purchased for. Rare and more expensive items should be kept in a category of their own and given special attention. If there is ever a dispute over the ownership of such items, you can invest in title insurance. Based on your total possession estimate value, you should be able to gauge how much insurance you should purchase.
Should I Get Additional Living Expenses Coverage (ALE)?
ALE insurance doesn’t just come in handy in the rare chance your house is completely destroyed, and you must temporarily relocate until repairs are done. It’s a type of insurance that can cover you when any aspect of your home life is compromised. Let’s say that your kitchen suffers a grease fire, or your home becomes infested with pests. You’ll have to either eat out or stay in temporary lodgings that can rack up additional expenses. The key to ALE insurance is that it covers any added cost of living you rack up when living outside your home or insured property.
If you were once paying $400 a month for food and groceries and now have to eat at restaurants which doubles your monthly food expenses to $800, an ALE policy would reimburse you $400, for example. Insurance companies use an equation of their own to estimate how much additional living expense coverage you should carry. They usually take 20% to 30% of your dwelling insurance and apply it as your ALE insurance limit. In that regard, it’s impossible to know how much ALE insurance you should carry without having an idea of your home replacement cost. In conclusion, it all begins with you surveying and inventory of your home and property. No one knows your property like you, the owner, do.