How Much Homeowner's Insurance Do You Really Need?
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When you’re in the process of buying a home or are reassessing your insurance policy, it’s natural to wonder: How much homeowner’s insurance do I really need?
It’s a tricky question because it depends on a number of factors and how much protection you’d require in the event of a total loss. In determining the limits and deductibles for your homeowner’s insurance policy, be sure to take into account the following considerations.
1. The cost to rebuild your home
What you paid for your home or its assessed value are not necessarily comparable to how much it would cost to rebuild your it entirely. Although this is a worst-case scenario, that would be the instance in which you most need your homeowner’s insurance to be sufficient.
To broadly estimate rebuilding cost, contact a local real estate agent for the per-square-foot building cost in your area. Then, multiply that number by your total square footage.
In calculating rebuilding costs using the per-square foot method, bear in mind that it does not include the value of your land or what it might take to replace detached buildings and fencing. This ballpark estimate also doesn’t take into account special features in your home, such as custom additions or fireplaces.
2. Protection for personal possessions
There are two types of coverage for personal property: homeowner’s insurance for the actual value or for the replacement value. Actual value on older items depreciates over time, so there is a higher payout on claims for replacement value.
There are also limits to how much homeowner’s insurance will cover for certain types of items, such as jewelry. So, in making decisions on how much protection you need for your personal items, it is useful to conduct a home inventory.
Software or even mobile apps like Sortly or MyStuff can be helpful in this regard, and you might even consider specific insurance for high-dollar items like engagement or wedding rings.
3. Potential additional living expenses (ALE)
Additional living expenses (ALE) come into play if you must leave your home during repairs following a disaster. These expenses include hotel rooms, eating out, and travel. The amount you need for ALE depends on things like the size of your family or if there’s another place to go until your home is livable again.
So, if you have a second home, you may not need as much coverage for ALE than if you have no family or friends with whom you could stay in an emergency. You would also need more ALE if you have a large family, necessitating more than one hotel room and a lot of eating out.
4. Liability protection
The liability portion of homeowner’s insurance provides protections in the event of litigation against you by others for property damage or bodily injury.
In deciding how much liability insurance you need, consider your assets that could be at risk. This goes beyond the value of your home to things like your investments. If your assets are worth more than the standard liability coverage that comes with your homeowner’s insurance, you might consider increasing those limits or adding an umbrella policy to mitigate those risks.
Standard homeowner’s insurance does not cover issues stemming from floods or [earthquakes](. If you do not want these gaps in your home policy coverage, you must purchase additional flood insurance and earthquake insurance.
These are two separate additions, and you may be at greater risk if your home’s location is in a high flood risk zone or near a fault line.