How much home insurance do I need?

June 17, 2022

"How much home insurance do I need?" is a question all homeowners have asked. We've got the answers!

Couple researching how much home insurance coverage they need

Whether you're a first time home buyer or simply evaluating your finances, homeowners are often faced with an important question: How much home insurance do I need? Your insurance agent will recommend a coverage amount, but it's always helpful to learn a little more about the process yourself. 

On the surface, the answer may seem obvious: You need enough to rebuild your home in the event of a total loss, right? But as soon as you dig a little deeper, you'll find that it's not quite so simple. How much does it cost to rebuild your home? How much liability insurance do you need? Do you have enough to cover your personal belongings? Every situation is a little different, but answering some of these questions will help you better understand yours. 

So read on today as we tackle these questions head-on and look at all the variables that go into determining how much home insurance you need!

Home and Property Insurance definition

Let's begin by going through a few important definitions. This may be a bit of a refresher, but it's important to know just what we mean when we use terms like "home insurance, "property insurance," and "homeowners insurance."

Homeowners insurance. Homeowners insurance typically refers to several different coverages rolled into one. It includes insurance for your dwelling, your personal belongings, and a liability portion. 

Home or property insurance. You may have also heard of "home insurance," which is not quite the same thing as homeowners. Home insurance is a type property insurance policy, which includes coverage for your dwelling, and possibly other structures like detached garages and sheds, as well as insurance for the personal contents within. 

Property insurance does not technically include a liability portion, but companies that offer home or property insurance will almost always include a separate liability policy as part of the deal. 

Liability insurance. Whether you have liability insurance as part of your homeowners policy, or have a separate liability policy in conjunction with your property policy, it is an important set of coverages to have. Liability insurance provides coverage for unexpected incidents for which you may be legally liable. For example, if someone falls and injures themselves on your stairs, liability could help cover the resulting expenses you're responsible for. 

Contents coverage.
 Both homeowners and property insurance policies provide some coverage for your personal belongings, or the personal items within your dwelling.

Dwelling. You may be asking yourself, "what does dwelling mean, exactly?" Dwelling is just another word for your house, home, or the structure you live within. "Dwelling" is used to distinguish your living unit from from other structures on your property, like a storage shed, barn, or detached garage.

With those definitions out of the way, we can look more closely at the question at hand. However, to answer our question, "How much home insurance do I need?" we need to ask ourselves a few other questions, first. 

How much dwelling coverage do I need? Determine how much insurance you need for your home's structure

Whether you have homeowners insurance or home insurance, determining the coverage limits for your dwelling, or your home's structure, is an important first step when evaluating your needs. Let's take a look at a few things you'll want to consider. 

How much does it cost to rebuild your home? 

As you might have guessed, the cost of rebuilding your home is a huge contributor to your overall coverage needs. The cost of rebuilding your home is based on a number of components, such as:

  • Construction and labor costs in a given market
  • The size/square footage of your home
  • The style of your home
  • Number of rooms and bathrooms
  • The types of materials used within your home
  • The types of materials used in your exterior walls
  • The types of materials used for your roof
Of course, any custom features your home may have can also impact the cost of rebuilding. Features like:

  • Fireplace
  • Special kitchen or bathroom amenities
  • Older types of decor that could be hard to source or replicate
  • Special or irregular windows
  • Any other unique or speciality feature, like a custom staircase

Changes or additions

You'll also want to take into consideration any changes, additions, or improvements that you've made to your home. Substantial changes, like adding an additional room or a major renovation, can add value to your home and therefore increase the cost to rebuild. 

This is an important part of evaluating how much home insurance you need if you're looking to buy a new policy, but it's also important to keep in mind if you've already purchased a insurance. If you already have an insurance policy for your home, it's essential that you notify your insurance agent any time you make major changes to your home.

Rising costs

Even if nothing about your home changes, the amount of home insurance coverage you need is sure to increase over time. Economic forces like inflation and material cost fluctuation will always be something to keep in mind. 

In most cases, it is sufficient to simply speak to your agent when renewing your policy to reevaluate your coverage. However, in times of greater economic volatility, or in the event of some major event that could impact the supply chain or availability of labor, the cost to rebuild could increase faster than expected

Fortunately, there are ways to prepare for this. If you're concerned that you don't or won't have enough home insurance coverage, it's always a good idea to talk to your agent about possible solutions.

Replacement cost vs market value

In most cases, the cost to rebuild your home is based on the Marshall & Swift/Boechk (MSB) valuation, which is used by insurance carriers and construction companies. This is not the same as the market value of your home, and that is a key point to remember. 

The market value of your home might be more or less than the replacement cost depending on a number of factors. Generally speaking, market value is determined by things like your location, proximity to schools and public resources, how well-developed the neighborhood is, and so on. Also, keep in mind that the market value of your home includes the value of the property your home is built on - not just the structure. 

For example, let's say you purchased your first small starter home five years ago in an older part of town with lower property values. However, in the last several years, your neighborhood has become a hotspot for growth, and has seen an influx of new businesses and development. In this case, your property value, and the market value of your home, would likely increase, but the cost to rebuild your home would be more or less the same (assuming there were no major changes to material and labor costs). 

This is especially important to note if your bank requires your home or homeowners insurance policy to be based on your mortgage. Your mortgage is tied to the market value, or the cost you paid to purchase your home - not necessarily the cost to rebuild it; the cost to rebuild your home may be more or less than your mortgage. 

How much personal property coverage do I need?

Apart from the structure of your home, homeowners or home insurance can help cover your personal belongings within. In many cases the limit for personal belongings is a percentage of your dwelling coverage (such as 50%), but how do you know if that will be enough? 

The best way to make sure that you have enough coverage for your personal property is to take a home inventory. Using something like a home inventory checklist (like this one), keep a detailed list of your belongings, the approximate date you purchased them, and their value. 

Keep in mind that there are likely coverage limits for individual items, especially more expensive items like jewelry, high-end electronics, and art. It is not uncommon for a the value of a particular belonging to exceed those limits.

If you find that the standard coverage for personal belongings isn't enough, make sure to discuss this with your agent or provider as these limits can usually be increased for an additional premium. You can often cover specific items that don't fall within the standard coverages by scheduling that item on a personal property floater endorsement.

How much liability insurance do I need?

Having liability coverage of some type is essential for homeowners. While liability is included as part of a homeowners insurance policy, it is standard practice to purchase a personal liability policy with a property insurance policy, too. Therefore, understanding your liability needs will help you figure out the total cost of insuring your home regardless of which policy type you have. 

While homeowners and property insurance protect your home and belongings from perils like fires, liability insurance covers your assets in the event of some sort of legal action that could jeopardize your belongings. If someone injures themselves on your property, you could be sued and held liable for damages. 

Generally, insurers offer a standard amount of liability coverage (like $100,000 for example) with the option to increase it to a point (like $500,000 for example). If you find that the maximum level of liability insurance offered won't cover all of your assets, you may want to consider purchasing additional layers of liability in the form of umbrella insurance

Umbrella insurance is an added layer of liability coverage that can be purchased in addition to the coverage offered by your homeowners or personal liability policy. However, depending on the carrier, a policyholder has to already have the maximum amount of coverage for their underlying policy before umbrella can be purchased.

Do I need more additional living expenses coverage? 

If you are unable to live in your home due to a loss, homeowners and home insurance often pays for certain living expenses, such as the cost of temporary lodging. This feature is included in the cost of most basic policies, but depending on you and your family's needs, it may not be enough. However, additional cost of living coverage can be purchased in most cases.

In summary...

So, to review, in order to answer the question, "how much home insurance do I need?" you need to determine:

  • The cost of rebuilding your home
  • The amount of personal property coverage you need
  • The amount of liability insurance you need
  • The amount of additional living expenses you need
While many insurance carriers can offer a generalized quote with limited information, a more accurate, personalized quote requires going into the details of each of these areas. An insurance agent can work with you to evaluate your individual needs and determine exactly how much home insurance coverage is right for you!

Woman researching how much home insurance coverage to buy

Need help figuring out how much home insurance you need? Germania Insurance can help! Request a free quote online or reach out to your local Germania Authorized Agent today! 

by Geoff Ullrich

About the Author

Geoff Ullrich is a writer and Content Marketing Strategist at Germania Insurance.

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