How much homeowners insurance do I need? You need enough insurance to cover the following:
You need enough insurance to cover the cost of rebuilding your home at current construction costs. Don't include the cost of the land. And don't base your rebuilding costs on the price you paid for your home. The cost of rebuilding could be more or less than the price you paid or could sell it for today.
Some banks require you to buy homeowners insurance to cover the amount of your mortgage. If the limit of your insurance policy is based on your mortgage, make sure it's enough to cover t
he cost of rebuilding. (If your mortgage is paid off, don't cancel your homeowners policy. Homeowners insurance protects your investment in your home.)
For a quick estimate of the amount of insurance you need, multiply the total square footage of your home by local building costs per square foot. To find out construction costs in your community, call your local real estate agent, builders association or insurance agent.
Factors that will determine the cost of rebuilding your home:
Most standard homeowners policies provide coverage for disasters such as damage due to fire, lightning, hail, explosions and theft. They do not cover floods, earthquakes or damage caused by lack of routine maintenance.
Replacement cost policies.
Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality. There is no deduction for depreciation -- the decrease in value due to age, wear and tear, and other factors.
Guaranteed or extended replacem
ent cost coverage.
After a major hurricane or a tornado, building materials and construction workers are often in great demand. This can push rebuilding costs above homeowners policy limits, leaving you without enough money to cover the bill. To protect against such a situation, you can buy a policy that pays more than the policy limits. A guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the fire or other disaster.
Consider adding an inflation guard clause to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area.
Your personal possessions
Most homeowners insurance policies provide coverage for your personal possessions for approximately 50% to 75% of the amount of insurance you have on the structure or "dwelling" of your home.
To determine if this is enough coverage, you need to conduct a home inventory. This is a detailed list of everything you own and information related to the cost to replace these items if they were stolen or destroyed by a disaster such as a fire. If you think you need more coverage, contact your agent or insurance company representat
ive and ask for higher limits for your personal possessions.
Replacement Cost or Actual Cash Value.
You can insure your possessions in two ways. You can either insure your belongings for their actual cash value or their replacement cost. A cash value policy pays the cost to replace your belongings minus depreciation. A replacement cost policy, on the other hand, reimburses you for the cost to replace the item.
Insuring expensive items with floaters/endorsements.
There may be limits on how much coverage you get for expensive items such as jewelry, silverware and furs. Generally, there is a limit on jewelry for $1,000 to $2,000. You should ask your agent or look it up in your policy. Insurance companies may also place a limit on coverage for computers.
Additional living expenses after a disaster
This is a very important feature of a standard homeowners insurance policy. This pays the additional costs of temporarily living away from your home if you can't live in it due to a fire, severe storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses incurred while your home is being rebuilt.
Liability to others
This part of your policy covers you against lawsuits for bodily injury or property damage that you or family members cause to other people. It also pays for damage caused by pets. It pays for both the cost of defending you in court and for any damages a court rules you must pay. Most homeowners insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available. It is recommended that homeowners consider purchasing at least $500,000 worth of coverage of liability protection.