Not everyone needs the same amount of home insurance, because everyone’s home is different. That being said, you should have enough insurance to rebuild your home from scratch and replace all your personal possessions.
All standard home insurance policies consist of several coverages working together to provide you with overall protection. Your main coverages are dwelling, personal property and personal liability. For a better understanding of what’s right for you, let’s consider each of these coverages.
How much dwelling coverage do I need?
Your dwelling coverage amount should equal the cost of rebuilding your home from the ground up in case of a total loss. It is not based on your home’s market value. An independent insurance agent or local builder can help you determine the right amount of dwelling coverage for you.
Rebuilding Costs
A home’s rebuilding costs are based on many factors, such as the following:
- Size and square footage
- Roof and architectural style
- Age and historic features
- Cost of building materials
- Labor costs
Inflation protection
You may want to add inflation coverage to your home policy, if it’s not already included. Inflation coverage automatically adjusts the amount of insurance you have to match inflation. In other words, if the cost to repair or replace your home goes up due to inflation, your insurance limits go up, too.
How much personal property coverage do I need?
You should have enough personal property coverage to replace all your belongings in case they are damaged or destroyed in a total loss. Most standard home policies offer personal property coverage that is between 50% and 75% of the total insured value of your home.
For example, if your home is insured for $300,000, you should have between $150,000 and $225,000 of coverage for your belongings. Check the declarations page of your policy to confirm your exact coverage amount.
Make an inventory of your belongings
To figure out how much personal property coverage you need, create a detailed home inventory of your belongings. Walk through each room and list the items; be sure to include brand names and serial numbers. This will allow you to accurately estimate what each item is worth today.
Actual cash value vs. replacement cost value
If your policy covers the actual cash value of your personal belongings, you’ll only be paid what each item is worth at the time of the loss. With replacement cost value, you’ll be paid enough to buy brand-new, similar items, regardless of depreciation. Upgrading to replacement cost should only run you a few extra dollars per year.
Example:
A fire damages your sofa, which you purchased for $1,000 several years ago.
- With actual cash value, you’ll receive what your sofa is worth today. This may only be $500 due to depreciation.
- With replacement cost value, you’ll receive enough to buy a new sofa with the same basic specs. In this case, that may be $1,200 due to inflation.
Highly valuable and unique items
Most standard home policies cap coverage for any single item at a set dollar amount, such as $1,000. However, certain highly valuable items, like jewelry and furs, may be worth more than that amount. Fortunately, there are ways to fully protect these items.
Example:
You own an engagement ring worth $3,500. To fully protect it, you could either:
- Purchase a scheduled personal property rider only for this one item, or
- Purchase blanket jewelry coverage, which can cover multiple items
How much personal liability coverage do I need?
On a standard home insurance policy, personal liability coverage is typically $100,000. If you want more coverage, higher limits are available. Personal liability coverage protects you if you’re found legally responsible for a loss suffered by another person, whether it’s an injury or damage to their property.
What is umbrella insurance?
Umbrella insurance is extra liability coverage that provides additional protection over and above the existing limits of your home, auto or boat insurance policies. Sold as a separate policy, umbrella insurance only kicks in when your home insurance policy’s liability limits have been exhausted.
For example, if you are found legally responsible for an accident that results in damages of $1,000,000, but you only have $500,000 of personal liability coverage, your umbrella insurance can help cover those additional costs.