Homeowners insurance protects what may be one of the biggest investments of your life: Your residential property. But if you don’t buy sufficient coverage, your protection falls short, leaving you on the hook for huge repair bills or facing an expensive lawsuit.
But how do you know how much homeowners insurance you need? The key is to walk through each standard coverage in your policy, adjust amounts as needed and then consider extra coverage to plug big holes. Here’s how to do that.
Choosing the Right Dwelling Coverage
“Dwelling” essentially means your house structure. The insurer will pay to rebuild the house if it’s destroyed, or make repairs, after problems such as fire, hail and lightning.
Important to note: Rebuilding and repair costs are paid up to your coverage limit. If your dwelling was underinsured, you won’t receive enough insurance money to fully rebuild it.
Standard Dwelling Coverage
Dwelling coverage should be based on the cost in your area to rebuild the house, based on local construction and materials costs. Unless you have a builder in the family, you can’t possibly know this number, but your home insurance company can provide an estimate.
Dwelling coverage limits should be updated regularly, every year if needed, to reflect changing local labor and materials costs.
Standard homeowners insurance policies today will cover the house structure for any problem except damage that is specifically excluded. These exclusions are listed in the policy and generally include floods, earthquakes, nuclear hazards, mold and other issues.
Buying Better Dwelling Coverage
Having sufficient dwelling coverage to rebuild your house is the foundation of a good homeowners insurance policy. But there are times when even the “right” amount of coverage can fall short. For example, after widespread disasters, especially, such as a tornado, the cost the materials and labor can shoot up due to demand. That’s where coverage that allows wiggle room is useful.
Extended replacement cost: Some (but not all) home insurance companies offer extended replacement cost. This feature can provide anywhere from 10% to 50%—or more—of extra coverage to absorb a cost spike. PURE, for example, provides an additional 100% for extended replacement coverage in its policies for high-value homes.
Insurers offering “extended replacement cost” include:
- COUNTRY Financial
- Grange Insurance
- QBE Insurance
Guaranteed replacement cost coverage is even better because it pays to rebuild your house no matter how much building costs have gone up.
Insurers offering “guaranteed replacement cost” (and usually also extended replacement cost) include:
- Acuity, A Mutual Insurance Co.
- Central Mutual
- Cincinnati Insurance
- The Hanover
- Palisades Property & Casualty
Availability of extended and guaranteed replacement cost can vary by company, state, policy type and even by house type.
Choosing the Right Contents Coverage
Your contents coverage reimburses you for the contents of your home that are damaged or destroyed. This encompasses your furniture, decorations, clothes, electronics, toys and appliances.
Replacement Value for Better Protection
While some policies offer “actual cash value” coverage, you generally want to have “replacement cost” coverage. This reimburses you for the cost of buying new items, not the depreciated value of what was destroyed.
Adjusting Your Contents Coverage
Most home insurance policies will default to a percentage of the dwelling coverage to determine contents coverage. This default could be 50% of the dwelling insurance. If you had $300,000 in dwelling coverage, this would provide $150,000 for replacing belongings. You may find this insufficient when you consider all the furniture, rugs, clothes and other items you would want to replace.
You can adjust your contents coverage upward to get better insurance protection.
Many standard policies also limit theft coverage on certain items, such as jewelry, watches, precious and semiprecious stones, and silverware. For example, a standard home insurance policy typically limits theft of jewelry to $1,500 in coverage. To account for this, you can “schedule” expensive items in order to get full coverage.
“Open Peril” Coverage for Belongings
Common home insurance policies cover damage to contents from 16 “perils,” which are listed in the policy. These perils include all the problems you’d expect, such as fire, lightning and explosions. But limiting coverage to 16 perils leaves you open to a potential gap in coverage.
Instead, buy a comprehensive policy that provides “open peril” or “all peril” coverage on your contents, for better protection.
“The comprehensive peril plan works in the customer’s favor,” says Bob Buckel, vice president of product management at Erie Insurance.
Getting Better Liability Insurance
Homeowners often focus their attention on coverage for their property within a home insurance policy. But just as important is your liability coverage.
Liability insurance pays lawsuit judgments and settlements against you if you’re sued over injuries or property damage accidentally caused by you, a family member or a pet. It also covers legal defense costs. For example, if someone sues you over a bite from your dog, liability insurance covers you.
A homeowners policy might default to only $100,000 in liability coverage. But if you face an expensive lawsuit, this amount is not adequate.
“We recommend having enough liability coverage to at least cover your assets,” says Buckel of Erie Insurance. “Therefore, let’s say [you have] a $200,000 house, a nice car, and some money in the bank, you may want to buy at least $300,000 in coverage to protect your assets.”
Getting ample liability coverage is easy by buying an umbrella insurance policy. Umbrella insurance provides extra liability coverage above both your homeowners and auto insurance policies. Because you can buy umbrella coverage worth millions of dollars, you can properly cover your net worth.
Getting Sufficient Loss of Use Coverage
If you can’t live in your home while it’s being repaired due to a claim, loss of use coverage, also called additional living expenses coverage, will reimburse you for the extra costs of living elsewhere. It may reimburse you for loss of rent income if you rent a portion of the home.
The default coverage for loss of use could be 20% of the dwelling coverage. When you think about the extra costs for a hotel and restaurants, that might not be enough. You can increase your loss of use coverage.
Better Home Insurance At a Glance
Natural Disasters Not Covered by Home Insurance
Some disasters require extra coverage, such as floods and earthquakes. Both of these are generally excluded from home insurance coverage.
- Flood insurance is available through FEMA and private flood insurance companies.
- Earthquake insurance is offered by many home insurers. In California, many insurers offer policies from the California Earthquake Authority.
- In some coastal areas, such as coastal Texas, homeowners must buy windstorm coverage separately from home insurance.
Additional Coverage You May Need
Depending on your situation, you may need additional coverage that’s not included in a standard policy. This can usually be done with add-ons and endorsements to your base policy.
Home business coverage. If you run a business out of your home, especially where customers come and go, you likely need business liability and business asset coverage. For example, if a customer is injured in your home office, you would need business liability insurance.
Identity theft. It can be expensive to recover from identity theft or being hacked. Floyd Yager, senior vice president of product management at Allstate, notes that cybercrime and identity theft are common exclusions in a homeowners policy.
“If your identity is stolen and they take funds out of your bank account, your homeowners insurance policy will not cover the loss,” he says.
Identity theft insurance is commonly available from home insurers. It reimburses you for money lost from these problems. For example, Allstate offers an identity theft endorsement that reimburses up to $25,000, for $30 annually (depending on the state).
More Home Insurance Extras
Home insurance companies often offer a wide variety of endorsements to fill other coverage gaps. Depending on the company, you might be able to add on:
- Increased coverage for landscaping
- Service line coverage
- Increased coverage for ordinance or law (when rebuilding triggers the need to comply with a new law, such as new building codes)
- Inflation guard (keeps dwelling coverage up to date with the costs to rebuild)
- Bed bug coverage
- Home day care coverage
- Home systems breakdown coverage
- Water backup and sump overflow