How Much Homeowners Insurance Do I Need?
When you're choosing a home insurance policy, you should aim for enough coverage to protect all of your assets if your house is destroyed in a disaster or you're held liable in a lawsuit.
Generally, homeowners insurance policies cover four main areas. Not every homeowners policy contains all of these coverages. Make sure your insurance will cover enough of your expenses, or consider getting extra coverage.
- Dwelling coverage: to rebuild your home
- Personal property coverage: to replace destroyed personal property
- Liability coverage: to cover costs if someone is injured on your property and sues you
- Additional living expenses (ALE) coverage: to cover expenses if you move out of your house during repairs
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How much coverage to get
How much dwelling coverage do I need?
You should have enough dwelling insurance to cover the cost of rebuilding your home and any attached structures, such as a garage. Remember to account for replacing built-in appliances, such as a water heater.
There are three levels of coverage. Unfortunately, some homeowners don't realize that their policy’s limits aren't high enough to replace their home entirely.
Coverage type | Definition |
|---|---|
| Actual cash value (ACV) | The ACV is the market value of your house, minus depreciation. While the value of your land may have increased since you bought it, specific elements of your house, such as the roof, plumbing or floorboards, have aged, which may depreciate the home’s value. That’s why the ACV likely won't cover the entire cost to rebuild your home with new materials. |
| Replacement cost value (RCV) | The RCV is the cost to rebuild your house at current prices for labor and materials. A policy that covers your home's RCV will cost more than one that covers only the ACV. RCV coverage could provide a lot more money if you need to replace all or part of your home. However, it is still subject to policy limits. |
| Guaranteed replacement cost (GRC) and extended replacement cost (ERC) | The GRC/ERC is like the RCV, plus a guarantee that the insurance company will pay a certain percentage beyond your policy's limits to rebuild your home. This is relevant if a regional disaster temporarily drives up the cost of labor and building materials. This is the most expensive option. |
For example, say your pipes burst, flooding the ground floor of your home.
The wooden flooring that you installed 10 years ago for $10,000 needs to be totally replaced. The insurance adjuster estimates that with 10 years of wear and tear, the current ACV of your flooring is only $6,000, even though new flooring will cost $11,000.
Also, your home insurance policy has a $1,000 deductible.
An ACV policy would only reimburse you $5,000, and you'd have to pay the rest out of pocket, but an RCV policy would reimburse you $10,000, leaving you to pay only the deductible.
If you own a condo, certain elements of your home's structure, such as the walls, may be covered under the condominium master policy. Read your master policy to determine the amount of dwelling coverage you need for your condo.
Most homeowners insurance companies require you to be insured for at least 80% of the replacement value of your home.
This is known as the 80/20 rule. If you're underinsured, you'll get less money if you file a claim.
Let's say your home is insured for $200,000 but would cost $300,000 to rebuild.
If you file a claim for $100,000, the insurance company could prorate your settlement by the percentage that you're underinsured.
In this case, you would get $67,000, minus your deductible, and have to pay for the remaining repairs out of pocket.
How much does dwelling insurance cost?
The amount of dwelling coverage included in your policy has a big effect on the rate you pay. Our research found that a home with $250,000 of coverage is 37% more expensive to insure than one with a $150,000 limit, and a $350,000 limit equates to a 75% increase in rates.
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Cost of home insurance by dwelling coverage amount
Dwelling coverage | Annual cost | Monthly cost |
|---|---|---|
| $150,000 | $2,096 | $175 |
| $250,000 | $2,862 | $239 |
| $350,000 | $3,672 | $306 |
How much personal property coverage do I need?
The best way to ensure you have enough personal property coverage to replace your belongings is to put together a home inventory.
A home inventory is a detailed and comprehensive list of every item in your house. That might sound like a lot of work, but it's an important step if you want to get quality replacements for your items if they're destroyed by a covered loss.
Include as many details as you can about every item on your list, such as:
- Name and model number
- Serial number
- Description
- Cost or receipt
After completing your inventory, total the value of your belongings and check that number against your coverage limits.
Insurance companies often set personal property coverage limits at 75% of your dwelling coverage by default. For example, if your home is worth $200,000, then your personal property limit would be $150,000.
How much liability insurance do I need?
Personal liability insurance covers the cost of a lawsuit if you're sued for destroying someone's property or causing an injury. In this case, the amount of assets you have dictates the amount of liability coverage you need.
For example, if your dog bites a neighbor or someone slips by your pool, you could be responsible for paying their medical bill.
If your liability coverage limit is $100,000, but you're found liable in a $250,000 lawsuit, you would have to pay the $150,000 difference. Personal assets like your car could be claimed in the settlement.
How much is liability insurance?
Fortunately, liability insurance is typically one of the cheapest components of a homeowners insurance policy. The difference in price between $100,000 and $300,000 worth of liability coverage is only $18 per year, and $1 million of coverage costs as little as just over $5 per month.
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Average annual liability insurance cost
Liability coverage | Annual cost |
|---|---|
| $100,000 | $16 |
| $300,000 | $34 |
| $500,000 | $47 |
| $1,000,000 | $62 |
If you're concerned about having enough liability coverage, you can also consider buying an umbrella policy — which goes into effect if your regular home insurance liability coverage is used up.
Which assets can be taken in a lawsuit?
Most of your possessions — such as your vehicle and the money in your bank account — are at risk if someone sues you and you don't have adequate insurance.
However, some assets, such as retirement funds, are exempt from lawsuits. Under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both Roth and traditional IRAs are protected up to $1.5 million combined. This amount is adjusted for inflation every three years.
SEP IRAs, SIMPLE IRAs and most rollover IRAs are fully protected from creditors in a bankruptcy. Money in a company-sponsored 401(k) is exempt, and in some states, such as Florida, home equity is protected.
Assets at risk in a lawsuit | Assets that may be protected |
|---|---|
| Vehicles titled in your name | 401(k)s |
| Boats | IRAs |
| Business assets that you personally own | Annuities |
| Non-dwelling real estate | Home equity |
| Future wages | Social Security benefits |
| Money in your bank accounts | |
| Investments | |
| Personal items |
Each state has its own legislation regarding how insulated your retirement funds are from a lawsuit. You should review your state's laws to determine what is at risk.
How much additional living expenses coverage do I need?
Most insurers set your additional living expenses (ALE) coverage at a fixed percentage of your total dwelling coverage amount, typically about 30%.
So if your policy has a $500,000 dwelling coverage limit, your ALE coverage limit would be $150,000. For a condo, your ALE coverage amount may be up to 50% of your dwelling coverage limit.
ALE coverage can be critical if you're temporarily displaced while your home is being repaired. For example, if your house is damaged in a fire and it will take two months to repair, you'll have to rent a different home until your house is in livable condition. In this case, ALE coverage may pay to provide comparable living conditions:
- Rent or hotel fees
- Gas for traveling between your house and temporary home
- Moving costs
- Food costs, if your temporary home doesn't have a kitchen
What type of insurance do I need?
An HO-3 policy is standard for most homeowners because it offers more comprehensive protection.
There are different types of homeowners insurance policies that offer various levels of coverage.
- HO-1 policies only cover damage as the result of a peril explicitly named in the policy. Unlike the other forms of homeowners insurance, it usually does not cover any damage to your personal belongings inside your home, only damage to the structure of the home. It usually does not include liability coverage.
- HO-2 policies cover damage that results from a peril explicitly named in the policy. It covers damage to your personal belongings inside your home, as well as the structure of your home.
- HO-3 policies are the most common type of homeowners insurance. All damage done to the structure of your home is covered, unless the damage was the result of a peril specifically excluded from your policy. By contrast, only some damage done to your personal property is covered. The peril that caused the damage must be specifically named in the policy.
- HO-5 policies cover all damage to the structure of your home and your personal property, unless the peril that caused the damage was specifically excluded from the policy.
- HO-8 policies are intended for an older home with a replacement cost greater than the actual cash value of the home. It only provides coverage when damage results from a named peril.
The limited coverage of an HO-1 policy is why only 1.6% of homeowners choose it. If you do have an HO-1 policy, you should consider whether you're truly comfortable paying to replace all of your possessions out of pocket and not having protection in a lawsuit.
Frequently asked questions
Do I need homeowners insurance?
Homeowners insurance is not required by law, but your mortgage lender may require you to take out a policy. But you should always have home insurance to protect against a catastrophic loss.
How much should homeowners insurance cost?
The average cost of homeowners insurance is $126 per month, or $1,512 per year. Rates vary based on your location, your home’s age and type, and the coverage limits you choose.
How much condo insurance do I need?
Most lenders require a minimum amount of dwelling coverage. Each lender's requirements will vary, but a good rule of thumb is either 20% of the value or $100 per square foot of your condo.
What is extended dwelling coverage?
Extended dwelling coverage is an additional amount of coverage that an insurance company agrees to pay above the dwelling limit if your home needs to be rebuilt. For example, if your home is insured for $300,000 and you have 25% extended dwelling coverage on your policy, the insurance company will pay up to $375,000 to rebuild your home. Many insurance companies offer this coverage as an optional policy add-on.
Methodology
To compare homeowners insurance rates, we gathered thousands of quotes from ZIP codes across Texas and five of the largest insurers in the state. Quotes are based on a home built in 1977 with the following coverage limits. (Dwelling and liability coverage limits were altered to determine differences in cost by coverage amount.)
Coverage | Limit |
|---|---|
| Dwelling | $229,700 |
| Liability | $100,000 |
| Personal property | 50% of dwelling limit |
| Medical payments liability | $5,000 |
| Additional living expenses | 20% of dwelling limit |
| Deductible | $1,000 |
This analysis used insurance rate data from Quadrant Information Services. These rates were publicly sourced from insurer filings and should be used for comparative purposes only. Your own quotes may differ.
Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.