What is one of the biggest risks you can take when buying home insurance?
not buying enough.
If a wildfire engulfs your house and you’re forced to rebuild it, wouldn’t it be terrible to find out you don’t have enough home insurance to cover the costs? Unfortunately, three out of five Americans could face exactly that situation because their homes are underinsured.1 There are many things covered by homeowners insurance, but there are also some things it doesn’t cover, like flooding and certain natural disasters.
Having the right amount of coverage for your home is critical. and you’re on the right track if you’re wondering, how much homeowners insurance do I need?
I’m here to help you figure it all out so you can protect your biggest investment.
Basically, you want to have enough home insurance to:
- rebuild your home (extended dwelling coverage)
- replace your things (personal property)
- cover injuries and damage that occur to your property (liability)
- reimburse your living expenses after the loss of an insured home (additional living expenses)
And if you already have homeowners insurance, but aren’t sure how much you have, check your insurance declaration page. This is a very helpful summary from your insurance company of exactly what you are paying.
- How much homeowners coverage should I have?
- How is replacement cost calculated?
- How much personal property coverage should I have?
- How can you estimate the cost to replace your things?
- How much liability coverage should you have?
- Should you get additional living expense (ALE) coverage?
How much home insurance do I need?
First, you want to buy the right amount of homeowners insurance for, well, your home. And if you have a mortgage, you’re actually required to have minimal homeowners and liability insurance. (If you’re researching homeowners insurance because you’re just starting to buy a home, check out our free homebuyer’s guide. It tells you everything you need to know about what can sometimes be quite a complicated process.)
Dwelling coverage promises to rebuild your home if it catches fire, collapses in a windstorm, or explodes without warning. When you hear home coverage, think about the structure of your home, all the materials used to build it, and anything attached to it, like a garage, deck, or front porch.
Here’s a no-brainer: Your homeowners coverage must equal the replacement cost of your home, which is the amount of money it would take to build a replica of your home.
You should definitely have replacement cost coverage for your home.
Calculating replacement cost can be tricky. but it’s your responsibility to get it right, so to make sure you get a good estimate, follow these three steps.
First, take the square footage of your home and multiply it by your local construction costs. You can find these costs on the websites of most construction companies, or you can have an independent insurance agent calculate these costs for you.
then use an online calculator to get a second estimate. There are free online calculators that use the square footage, building materials, and number of rooms in your home to give you a good estimate of replacement cost.
Third, once you have your own estimate, ask a professional to give you theirs. A knowledgeable independent insurance agent, like one of our trusted professionals, will know the local area and can help you calculate a very close estimate of replacement cost.
what factors affect replacement cost?
When you finally have an accurate replacement cost, you should check it every two years. To do so, be sure to keep an eye on these five factors that affect replacement costs.
1. new building codes that were established after your home was built
If a natural disaster wipes out your current home, your new home will need to meet updated building codes, which may require you to pay for new security features. insurance companies sometimes offer building code coverage, which means they’ll pay what the new codes require, so ask your insurance agent if that’s something you could add to your policy.
2. remodeled kitchens
Home is where the kitchen is, so it’s no wonder kitchen renovations change home values. quartz or granite countertops, double-tub stainless steel sinks, resilient flooring – whatever you’ve added, adjust your homeowners insurance to match the increase in your home’s value.
3. additional rooms and structures
Maybe your family grew, so you finished your attic to add bedroom space. Or maybe she added a garage, workshop, or covered porch. New rooms add value, and unless you update your homeowners insurance to account for these additions, you risk having to pay for them all over again. nobody wants that.
4. rising prices of building materials and construction costs
bricks, lumber and stone cost more over time, especially if a natural disaster has destroyed your part of town, created demand and reduced supply. Along with building materials, workers’ wages can rise, and construction costs will often rise with them. Some insurance companies offer something called guaranteed replacement cost coverage. This is exactly what it sounds like: they will pay to replace your home no matter how much construction costs have increased.
Guaranteed replacement cost coverage is absolutely the best coverage you can get, because it guarantees coverage for all possible outcomes! But this kind of top-tier coverage can be hard to find, and many companies don’t even offer it. on the other hand, most companies offer a useful option called extended replacement cost. extends your coverage by a certain percentage, which could be between 25% and 100%. even a 25% spread on your payment is nothing to sneeze at, but you should always get the highest percentage possible, and 100% is ideal.
5. old and difficult to replace features
“they don’t build them like they used to!” Yes, that is correct. building styles change over time, as do the number of carpenters who know how to make arched windows and elegant crown molding. If your home has unique features, especially those that require skilled labor, you may have to pay more to replace them.
Now that you have coverage for the structure of your home, let’s get coverage for your belongings, what most homeowners insurance policies call personal property coverage.
Personal property applies to your furniture, appliances, clothing, sports equipment, electronics, and even the food in your refrigerator. (after all, this coverage is personal). covers your belongings in case of destruction, theft or vandalism.
how much is enough?
You must have enough personal property coverage to replace all your belongings. A good question to ask yourself is: If I lost everything, how much would I need to recover?
many of us underestimate how much we own. maybe it’s because we buy things slowly over time – a road bike here, a flower vase there – that we lose sight of their value. The risk, then, is not insuring personal property well and ending up with a surprise when the refund check doesn’t replace the losses.
To prevent this from happening, take an inventory of everything you own. that’s how it is! all. start in your bedroom and work your way to the garage. take photos of each possession, especially the most expensive items. This may seem like a long time, but what takes a few hours to inventory could take a month or two of payment to replace. so be verbose!
what about rare and expensive items like jewelry, furs and musical instruments?
Personal property coverage has its limits. If you own an expensive watch or some high-end sports gear, you’ll want additional coverage. As you take inventory, separate out your most expensive items. Write down the estimated replacement costs for those items and ask your insurance agent if you need an additional policy specifically for them.
And since we’re talking about property insurance extras, you may have also heard of title insurance. this protects you if there is ever a dispute over ownership and is definitely worth the extra cost.
Now that your home and belongings are properly insured, the next step is to increase your liability coverage.
Liability is the part of your property insurance that covers your tail if someone is injured on your property. Anything can happen: a broken hip from a slip on the stairs, a broken arm after falling off a rickety swing set, or a snowball bitten by a dog, the pet you knew would never hurt a fly. then before you know it, you find yourself in a legal bind that drains your bank account.
but wait! there is hope. Homeowners insurance will cover accidents that happen on your property, so you won’t have to pay expensive medical bills or lawsuits.
Most homeowners insurance policies have a minimum of $100,000 in liability coverage. but you must buy at least $300,000 and $500,000 if you can. Liability is the biggest purchase in the insurance world, so buy as much as you can afford.
You should also consider an umbrella policy if you have a high net worth. this is just one more layer of responsibility to protect you and your assets. kicks in once you reach your liability limit on your standard policy.
side note: are all dogs covered by my homeowners insurance?
not. In fact, if you have a dog whose breed has been flagged by insurance companies as high risk, any incident involving your dog will not be covered by your homeowners insurance. For example, my adorable French bulldog, Olive, wouldn’t hurt a fly, but even if it did, it’s not considered a high-risk breed.
If you have one of the following dog breeds, please be aware that they are considered high risk by some carriers.
- pit bulls
- doberman pinschers
- great danes
- german shepherds
- Siberian Huskies
- Alaskan Malamutes
- Wolfdog hybrids
- Any mix of these breeds
Imagine a tornado destroys your house. how long will it take to rebuild it? a few months? some years? How much extra money will you spend sleeping in hotels and eating out while you wait for your house to be rebuilt?
hopefully nothing, if you have ale (additional living expenses) coverage (also called loss of use coverage). ale is like a super emergency fund: if you and your family were left with nothing after an accident (no place to live, no kitchen to use), ale would reimburse you for the added cost of homelessness.
the keyword here is added cost of living. For example, let’s say you cook all your meals and pay about $500 per month for groceries. one day a fire destroys your kitchen and suddenly you are forced to go out to eat. your monthly food bill increases from $500 to $900. ale would reimburse him for the extra $400 that hit his food budget.
Most homeowners insurance policies use a percentage of your extended home coverage to calculate your beer, usually between 20-30%. For example, if your extended home coverage is $200,000, your insurer might give you $40,000 (20%) for beer. If you have a large family and think your beer would be high, ask your insurance agent how you can get more beer.
do you have the correct amount of homeowners insurance?
When it comes to your biggest investment, your home, you can’t afford to be underinsured. That’s why it’s so important to choose the right independent insurance agent. Our network of Supported Local Providers (ELPS) will walk you through exactly how much home insurance you need and help you choose the right coverage, from homeowners to personal property to liability and additional living expenses. They can even check to see if you can save money by combining auto and home insurance.
If you want to be sure you have the right amount of home insurance, talk to one of our trusted professionals. each is also an independent insurance agent, which means they work for you, not the insurance company. they’ll find the coverage that fits your needs and budget, and you can be sure you’re working with an agent who cares.
find an elp today!