At some point, everyone has wondered: How much homeowners’ insurance do I really need? Too little, and you might be stuck paying for repairs out-of-pocket; too much, and you’re wasting your money on huge monthly premiums that aren’t doing you any good. The reality is that there’s definitely a sweet spot, and everyone’s is different.
And although it may seem like a pain to evaluate your policy to determine if you have adequate coverage, taking the time to do so will save you from future financial headaches. Read on to learn how to assess your current policy to see if your home is properly covered.
What are the Different Types of Insurance Coverage?
Before you begin, it’s important to understand the different types of insurance coverage that are included in a typical homeowners’ insurance policy:
- Dwelling Coverage: Protects the structure of your home, including walls, roof, and foundation.
- Personal Property Coverage: Covers your personal belongings, such as furniture, clothing, and electronics.
- Liability Coverage: Protects you against legal liability for injuries or property damage caused to others.
- Additional Living Expenses (ALE): Covers the cost of temporary housing if your home becomes uninhabitable due to a covered loss.
- “Other Structures” Coverage: Protects detached structures on your property, such as garages, sheds, and fences.
How to Determine How Much Homeowners Insurance Coverage You Need
Step 1: Evaluate Your Dwelling Coverage
To determine if you have enough dwelling coverage, consider how much it would cost to rebuild your home if it were destroyed. This amount is solely tied to the replacement cost, and it is not the same as your home’s market value or mortgage balance.
When determining how much dwelling coverage to get, consider factors such as:
- Square Footage: Ensure your coverage accounts for the total square footage of your home.
- Construction Costs: Research current local construction costs per square foot.
- Specific Features: Include the cost of any unique or custom features, such as high-end finishes or special architectural details.
- Building codes: Older homes may need to be brought up to modern municipal codes, which can add to the overall cost.
It’s important to note that while your initial dwelling coverage limit might have been sufficient, inflation or natural disasters can increase building costs over time. To prevent your dwelling coverage from falling short, you can ask your insurer about:
- An inflation guard on your policy. It automatically adjusts your coverage levels to keep pace with inflation.
- Extended replacement cost, which covers a percentage above your dwelling limit if needed.
- Guaranteed replacement cost, which pays for whatever amount is necessary to rebuild your home after a covered claim.
Step 2: Assess Personal Property Coverage
If your belongings are destroyed, your personal property insurance will pay to replace them. Insurance companies often set your personal property limit at a fixed percentage of your dwelling limit coverage, typically anywhere from 50% to 70%. However, you can raise or lower this limit depending on the determined value of your personal items.
When selecting the amount of personal property coverage, it’s recommended that you:
- Create a detailed inventory of your personal property. Include descriptions, purchase dates, and estimated values. Try to save receipts when possible.
- Consider high-value items. Special items like jewelry, art, or collectibles may require additional coverage through endorsements, such as scheduled personal property coverage. In these instances, your insurance provider may require an appraisal.
- ACV or RCV. See if your policy covers personal property through actual cost value (ACV), which subtracts for depreciation, or replacement cost value (RCV), which does not. Since most items depreciate over time, you may want to upgrade to RCV to ensure you can buy new items of similar quality.
Step 3: Review Liability Coverage
Homeowners insurance doesn’t just cover your home and belongings: it also protects you in the event you’re found liable for someone’s injury or property damage. Personal liability coverage often covers:
- Injuries on your property: If someone slips on your icy sidewalk and breaks their arm, liability coverage may help pay their medical bills (up to the limits of your policy).
- Damage to other property: If you, or someone in your household, is at fault for damaging someone else’s property, liability insurance will pay for repairs. An example of this is if your child is playing in the yard and accidentally throws a ball through your neighbor’s window.
- Lawsuits & court fees: If you end up being sued over an accident on your property, personal liability coverage will help pay for the lawyer expenses, legal fees, and settlement costs against you.
- Dog bites (sometimes): Some insurers will cover you in the instance your dog bites and injures someone, but the coverage may be limited to certain breeds.
To evaluate your liability coverage, consider the risks associated with your property and lifestyle, such as having a swimming pool, trampoline, or pets.
Most policies offer $100,000 to $300,000 in liability coverage, but depending on your risk assessment, you might need more. For added protection, consider an umbrella policy, which provides additional liability coverage beyond the limits of your standard homeowner’s policy.
Step 4: Check Additional Living Expenses (ALE) Coverage
Additional living expenses (ALE), as the name suggests, cover the costs associated with living away from your home during the time it takes to repair or rebuild it after a disaster. Depending on the severity of the damage, this can be anywhere from a few weeks to several months.
ALE tends to amount to about 10% to 20% of the insured dwelling coverage on the property. This means that if your house is insured for $300,000, you may have up to $60,000 to spend on additional living expenses. Other insurers may specify a length of time for coverage, like 12 or 24 months.
When determining if you have a sufficient amount of ALE coverage, determine how much it would cost to live away from home in your area. Consider the potential costs of things like:
- Hotel expenses
- Meals (if you don’t have access to a kitchen)
- Rent
- Transportation
- Laundry expenses
- Storage
- Pet boarding (if your pet can’t stay with you during this time)
Step 5: Consider Other Structures Coverage
If you have detached structures on your property, such as a detached garage, shed, or even a fence, verify that your insurance policy includes coverage for these as well. These are commonly covered for 10% of the dwelling coverage amount. That means if your home is insured for $300,000, you have $30,000 worth of other structures coverage.
If you have numerous or large other structures on your property, you may want to take the time to figure out their replacement cost. That way, if you feel the current coverage wouldn’t be enough to replace them, you could add more.
Step 6: Review Policy Exclusions and Endorsements
Understanding what your policy does not cover is just as important as knowing what it does cover. Review policy exclusions carefully, such as:
- Flooding and earthquakes: These events are typically not covered under standard homeowners policies and require separate insurance add-ons.
- Wear and tear: Routine maintenance issues are usually excluded.
- Sewer backup: Protects against damage from sewer backups, drain clogs, or sump pump failure.
- Home business: Covers business-related property and liability if you run a business from your home.
If you want coverage for these exclusions, you can purchase additional policies or endorsements. Although they’ll add to your monthly premium, it’s never a bad idea to have extra protection (as well as peace of mind).
Step 7: Update Your Coverage Regularly
Life changes fast, and so do your insurance needs. It’s important to regularly review and update your policy to ensure it reflects your current situation. It’s recommended that you review your coverage at least once a year around your renewal period to see if any changes are needed.
You should consider making immediate changes to your coverage when you:
- Renovate or remodel your home (ex, kitchen renovation)
- Add a new detached structure, such as a shed or guest house
- Purchase expensive items, like jewelry, art, or electronics
- Add “liability risks”, such as a pool or fire pit
Need Help Evaluating Your Coverage?
Fortitude Public Adjusters can help you evaluate your home insurance policies to ensure you have adequate coverage. Our expertise in the home insurance field allows us to identify any gaps in your current policy and recommend necessary adjustments to protect your home and assets.
Don’t leave your home insurance to chance—reach out to Fortitude Public Adjusters today for a comprehensive review.
