When thinking about how much home insurance you need, you need to think about the individual coverages and how much each is set at. You’ll want to make sure the dwelling coverage sufficiently protects your home, while the liability coverage is enough to protect your assets in the event of a claim or lawsuit.
How Much Dwelling Coverage Do I Need?
You need enough dwelling coverage to repair or replace your home in the event of a total loss such as a fire. When you purchase insurance, the carrier uses a formula to calculate the replacement cost of your home. This uses factors such as the square footage of the home, how many corners it has, the construction materials used, and the area’s construction costs.
On average, it costs $175 per square foot to rebuild a home. This does not factor in the demolition needed to clean and prepare the site for building.
But to give you an idea of what this dwelling value should be, assume a home is of average construction and has 2,000 square feet. If we multiply $175 for average construction costs by the square footage of 2,000, we get $350,000. This may be higher or lower than your fair market value. The dwelling coverage directly affects home insurance costs.
But is that enough? Not always.
You may want to elect the upgrade for older homes that is called building and ordinance. This is another 10% to 50% of the dwelling value that is dedicated to bringing old homes up to building code. New building codes could make rebuilding a home more expensive and building and ordinance covers that.
Note that you can request more dwelling coverage, but you’d probably need a contractor’s estimate to back it up. The insurance carrier won’t build you a bigger home than what you have so you need to make sure you properly answer questions about construction type, building materials, and upgrades.
How Much Liability Protection Do I Need?
Homeowners insurance policies all come with a minimum liability protection of $100,000. This is a cap of how much the insurance carrier will pay on claims alleging that you damaged or injured another party. It will also cover the costs of legal fees if the claim goes to court for any reason. Depending on the insurance carrier, the legal fees may be part of the cap or in addition to the cap.
While anyone can be held liable for claims exceeding the $100,000, those who don’t have a lot of assets usually don’t elect higher coverage. They operate on the premise that lawyers go after deep pockets and they can’t get from me what I don’t have. However, it’s important to remember that major claims, say, for example, a dog maiming a young child, could be hundreds of thousands of dollars in costs and claims. If you don’t have the insurance to back it, your wages could be garnished for years to come to pay the claim.
Having enough liability protection is really a matter of personal comfort with the risks of lawsuits and claims. Certainly, the more you have in assets, the more you have to lose in a claim and should look at higher coverage limits such as $300,000, $500,000, $1 million, or more. In fact, some people elect to have higher limits through an umbrella policy purchased alongside their homeowners insurance policy.
How Much Personal Belongings Coverage Do I Need?
Personal belongings coverage is the amount that pays for your furniture, appliances, home goods, clothing, and other personal items when damaged, or stolen in a claim. Most homeowners insurance policies list personal property as a defaulted percentage of dwelling costs, assuming the ratio it takes to fill a home with items. This default percentage varies from insurance carrier to insurance carrier and can be anywhere from 20% to 75%.
If your home dwelling value is $350,000, your personal belongings coverage can range from $70,000 to $262,500. Just because your insurance carrier uses a default, understand that is the minimum coverage you will get. You can elect more coverage. For example, if your coverage is $70,000 and you do a home inventory realizing that everything from socks and spoons is valued at $125,000, you can elect for more. If the minimum default is too much, you can’t downgrade that.
Also, not every top insurance carrier insures belongings at replacement cost. Some default to the depreciated value known as actual cash value which isn’t likely to make you whole during a claim. To be 100% protected, always elect for replacement cost coverage. This is an important point when shopping and comparing affordable home insurance options.
When you buy a homeowners insurance policy, most everything it covers is based on the dwelling coverage. Make sure you have your home properly insured for upgrades and higher-quality building materials if they are relevant. Look at liability coverage to make sure your assets are proportionally protected in the event of a lawsuit. Finally, do a home inventory to get a ballpark figure of what your belongings are worth to make sure you have adequate coverage.