How Much Homeowners Insurance Do I Need?

What’s one of the biggest risks you face when buying homeowners insurance?

Not buying enough.

If a wildfire devours your home and you’re forced to rebuild, wouldn’t it be awful to discover you don’t have enough homeowners insurance to cover the costs? Industry research shows two-thirds of homeowners don’t have the protection they need, especially considering the rapidly rising home values and construction costs we’ve seen in the last few years.¹

It’s crucial to have the right amount of coverage for your home. So you’re on the right track if you’re asking, How much homeowners insurance do I need?

Homeowners insurance covers a lot of things, but there are also some things it doesn’t cover, like flooding and certain natural disasters. I'm here to help you figure it all out so you can protect your biggest investment.

Basically, you want enough homeowners insurance to:

• Rebuild your home (extended dwelling coverage)
• Replace your stuff (personal property)
• Cover injuries and damages that happen on your property (liability)
• Reimburse your higher-than-normal living expenses after the loss of an insured home (additional living expenses)

And if you already have homeowners insurance, but aren’t sure how much you have, check out your insurance declaration page. This is a really helpful summary from your insurance carrier of exactly what you’re paying for.

Once we go over the following questions, you should have a good idea of how much home insurance you need—whether you already have some or are looking to buy for the first time.

1. How much homeowners insurance do I need?
2. How do you calculate the replacement cost?
3. How much other structures coverage should you have?
4. How much personal property coverage should you have?
5. How can you calculate the cost to replace your stuff?
6. How much liability coverage should you have?
7. How much additional living expenses (ALE) coverage should you have?
8. Do you need additional coverage?

First things first: You want to buy the right amount of homeowners insurance for your home structure (aka dwelling in insurance speak)—in case your home sweet home turns into a money pit.

And heads up, if you have a mortgage, you’re actually required to have a certain minimum of dwelling and liability insurance. (If you’re researching homeowners insurance because you’re just starting to shop for a home, check out our free Home Buyers Guide. It tells you everything you need to know about what can sometimes be a pretty complicated process.)

Dwelling coverage promises to rebuild your home if it burns down, crumbles in a windstorm, or gets crushed by a falling satellite. (The insurance business calls these hazards.) You know, all the usual nightmare stuff we hope never happens. When you hear dwelling coverage, think the structure of your house, all the materials used to build it, and anything attached to it, like a garage, deck or front porch.

So how much do you need? Your dwelling coverage should equal the replacement cost of your house, which is the amount of money it would take to build a replica of your home. Kind of a no-brainer now that you know.

You should definitely have replacement cost coverage for your home, which is what pretty much all standard policies offer anyway.

Calculating the replacement cost can be tricky—just like calculating how upset your wife will be if you tell her what you really think about her new hair color. But it’s your responsibility to get it right—so to make sure you calculate a good estimate, use these three steps.

Protect your home and your budget with the right coverage!

First, take the square footage of your home and multiply it by local construction costs. Try finding those local numbers online, or if nothing’s available, contact a construction company in your neck of the woods to see if they have the figures.

Next, use an online calculator to get a second estimate. There are free online calculators that use your home’s square footage, building materials and number of rooms to give you a good replacement cost estimate.

Third, once you have your own estimates, ask a professional to give you theirs. An expert independent insurance agent, like one of our RamseyTrusted pros, will know your area and can help you calculate a very close estimate of the replacement cost.

What factors affect the replacement cost?

When you finally have an accurate replacement cost, you should check it every couple of years. To do that, be sure to watch for these five factors that affect replacement costs.

New Building Codes That Take Effect After Your Home was Built

If a natural disaster wipes out your current home, your new home will have to meet up-to-date building codes which could require you to pay for new safety features. Insurance companies sometimes offer building code coverage, which means they’ll pay for whatever the new codes require—so ask your insurance agent if that’s something you could add to your policy.

Remodeled Kitchens

Home is where the kitchen is (at least in my house), so it’s no wonder kitchen renovations change home values. Quartz or granite countertops, copper farmhouse sink, resilient flooring—whatever fancy upgrade you’ve added, adjust your homeowners insurance to match the increase in your home’s value.

Additional Rooms and Structures

Perhaps your family grew so you finished your basement to add bedroom space. Or maybe you added a garage, a workshop or a screened-in porch. New rooms add value, and unless you update your homeowners insurance to account for these additions, you risk having to pay for them again. No one wants that.

Rising Prices of Building Materials and Construction Costs

Bricks, timber and stone cost more over time, especially if a natural disaster has wrecked your part of town, stirred up demand, and lowered supply. Along with building materials, workers’ wages may increase, and construction costs will often go up with them. Some insurance carriers offer something called guaranteed replacement cost coverage. This is exactly what it sounds like: They’ll pay for the replacement of your house no matter how much construction costs have risen. Yes, please.

Guaranteed replacement cost coverage is the absolute best coverage you can get—because it guarantees coverage for every possible outcome! But this kind of top-shelf coverage can be hard to find, and many companies don’t even offer it. On the other hand, most companies do offer a handy option called extended replacement cost. It extends your coverage by a certain percentage, that could be anywhere from 25% to 100% to help cover increased replacement costs. Even a 25% extension on your payout is nothing to sneeze at, but you should always get the largest percentage possible, and 100% is the ideal.

Old and Hard-to-Replace Features

“They don’t build ’em like they used to!” Yep, that’s for sure. Building styles change over time, and so do the number of carpenters who know how to make arched windows and elegant ceiling molds. If your house has unique features, especially ones that require specialized craftsmanship, you may need to pay for extra coverage to have them replaced.

Your typical home insurance policy will usually offer 10% of your dwelling coverage toward replacement of other structures. What are other structures? Good question. Your dream woodworking shop with an HVAC is included, and so is your garden shed with that one hedge trimmer from the ‘70s and a family of brown recluses in the back corner. Other structures include barns, fences and detached garages. I’ll have to get back to you on outhouses, for the hillbillies out there.

You should evaluate your structures to see if 10% of your dwelling payout will be enough to cover them. If your building is complex, chances are 10% won’t be enough.

A big trend in homeownership and real estate is owning an accessory dwelling unit (or as the cool kids call them, ADUs) or in-law apartment. But these things, which are often essentially small second houses in the backyard, are expensive, and you might have to buy extra coverage to get it protected.

Whether the ADU, (aka granny flat, guest house, carriage house) is attached to your house or not makes a big difference. If it’s something like a finished attic space or bonus room, your homeowners policy can cover it as long as your limit includes the value of the ADU. If it’s detached, however, you may need to purchase extra coverage. So attachment style is the main issue here, much like it is in therapy.

Insurance around ADUs differs by state. Make sure to talk to your local independent insurance agent about any ADUs you own as well as other structures. They can help you get the right coverage.

Now that you have coverage for the structure of your home, let’s get coverage for your stuff—what most homeowners insurance policies call personal property coverage.

Personal property applies to your furniture, appliances, clothes, sports equipment, electronics and even the food in your refrigerator. (This coverage is, after all, personal, and it would be a shame to lose those triple dozen free-range eggs you bought from Costco.) It covers your stuff if it’s destroyed, stolen (egg thiefs!) or vandalized.

You should have enough personal property coverage to replace all your belongings (minus the stuff you don’t want, like that Classic TV Westerns 300 episode DVD set you bought at 1 a.m. that one night).

Most standard policies offer 50% of your dwelling coverage in personal property coverage, but it can go higher. A local pro can help you figure out what different companies offer and help you get more if you need it.

A good question to ask yourself is: If I lost everything, how much would I need to get back on my feet?

When it comes to personal property coverage, there are two kinds to consider: actual cash value (ACV) and replacement cost.

ACV gives you what your stuff is worth on the day it went up in smoke (or whatever tragedy struck). In other words, depreciation is factored in. So whatever you paid for that hand-knotted New Zealand wool rug is not what you’re going to get. You’ll get the Facebook Marketplace covered-in-dog-hair-and-juice-stains price.

Replacement value on the other hand, forks over whatever you need to get a new one—including inflation. If you can, definitely go with replacement cost coverage. It will mean your rate is higher, but it’ll be worth it!

Many of us way underestimate how much we own. Maybe it’s because we buy things slowly over time—a flower vase here, a floor-to-mattress dog ramp there—so we lose sight of their value. The risk, then, is to underinsure personal property and end up with a shock when the reimbursement check doesn’t replace the losses.

To keep this from happening, make an inventory of everything you own that has value. That’s right. Everything. Make a game out of it! Start in your bedroom and work your way to the garage. Take photos (or better yet, a video!) of each possession, especially more expensive items. This may sound like a lot of time, but what takes a few hours to inventory could take a month or two of income to replace. So be detailed!

What about rare and expensive items, such as jewelry, furs and musical instruments?

Personal property coverage has its limits. If you own an expensive watch or some high-end sports equipment, you’ll want additional coverage. As you make your inventory, separate your most expensive items. Write down the estimated replacement costs of those items and ask your insurance agent if you need an additional policy (called scheduled personal property) specifically for them.

Now that your home and possessions are properly insured, the next step is to load up on liability coverage.

Liability is the part of your homeowners insurance that covers your tail if someone gets hurt on your property. Anything can happen: A fractured ankle from a slip on the stairs, a broken arm from falling out of a tree fort, or a dog bite from Snowball, the pet you always said would never hurt a fly. Then, before you know it, you find yourself stuck in a legal bind that drains your bank account.

But wait! There’s hope. Homeowners insurance will cover accidents that happen on your property, so you won’t have to pay expensive medical bills or lawsuits from people who read too many cheesy billboards that say “Injured? We can help!”

Speaking of pain, did you know not all dogs are covered under homeowners insurance?

That’s right. In fact, if you have a dog whose breed has been flagged by insurance companies as “high-risk,” any incidents involving your dog won’t be covered under your homeowners insurance. For example, my adorable little French Bulldog, Olive, wouldn't hurt a fly—but even if she did, she's not considered a high-risk breed.

If you have one of the following dog breeds, be aware that they’re considered high-risk by some carriers.

• Pit bulls
• Doberman Pinschers
• Rottweilers
• Chows
• Great Danes
• German Shepherds
• Siberian Huskies
• Alaskan Malamutes
• Wolf-dog Hybrids
• Any mix of these breeds

If you just have to have a wolf-dog hybrid, best of luck, because you’re on your own.

For everything else, most homeowners insurance policies have a minimum of $100,000 in liability coverage. But you should buy at least $300,000—and $500,000 if you can (because when it comes to fighting the biggest ambulance chasers in the country, coverage size matters). Liability is the greatest buy in the insurance world, so purchase as much as you can afford.

You should also look into adding an umbrella policy if you have a high net worth (above $500,000). This supplemental policy is just one more layer of liability to protect you and your assets. It kicks in once you’ved reached the limits on your standard policy.

Because an umbrella policy isn’t a standalone policy, you must already carry homeowners, auto or other kinds of insurance to get one.

A little ALE is fine, but you don’t want to get sloshed here. Seriously though, ALE, the insurance, is really good to have plenty of.

Imagine a tornado destroys your house. How long will it take to rebuild it? A few months? A few years? How much extra money will you spend sleeping in hotels and going out to eat while you wait for your home to be rebuilt?

Hopefully, nothing—if you have additional living expenses (ALE) coverage (also called loss of use coverage). ALE is like a super emergency fund: If you and your family were left with nothing after an accident—nowhere to live, no kitchen to use—ALE would reimburse you for the added cost of living without a home.

The key word here is added cost of living. For instance, let’s say you cook all your meals, and you pay around $500 a month for groceries. One day, a fire destroys your kitchen, and you’re suddenly forced to eat out. Your monthly food bill jumps from $500 to $900. ALE would reimburse you for the extra $400 hit to your food budget.

It may sound like we’ve covered every possibility at this point, but there could still be some gaps in your coverage.

What if you live in California with a view of the mountains and the San Andreas Fault? What if you own a bungalow bordering Louisiana’s levies? Insurance companies don’t cover certain natural disasters like earthquakes, floods, hurricanes (if you’re on the coast) and sinkholes (except in Florida and Tennessee). You can and should buy separate insurance for those events if they’re common in your area.

Insurance companies in some areas sell hail and wind protection separately or require a separate deductible for damage from those perils.

Just like with Mother Nature, insurance won’t cover certain acts of destruction when Murphy comes for a visit. Water damage from a clogged main sewer line or off-property sump pump isn’t covered, but you can buy water backup coverage separately if this is a concern.

And since we’re talking about homeowners insurance extras, you might have also heard about title insurance. This protects you (or your lender) if there’s ever a dispute over ownership, and it’s worth the extra cost.

Here’s a list of extra coverages you might want to consider:

How Do You Save Some Money?

It’s no secret I love saving money. But when it comes to home insurance or coffee makers, I don’t cheap out. Some things, like high-quality home insurance or Nespresso machines that help me channel my inner George Clooney, are worth the extra dough.

But that doesn’t mean you can’t also look for ways to save.

Your deductible, the cash out-of-pocket you pay before insurance kicks in, is the biggest area you can save on your homeowners insurance. The higher your deductible, the lower your rate.

Other ways you could save:

• Bundle your auto or other insurance with your home insurance
• Look for discounts for things like loyalty, improvements, added safety features and security systems (unfortunately, your dog doesn’t count)
• Pay your mortgage in full
• Replace damaged parts/items with more energy efficient ones to get a green improvement reimbursement

Do You Have the Right Amount of Homeowners Insurance?

When it comes to your biggest investment—your home—you can’t afford to be underinsured. That’s why choosing the right independent insurance agent is so important. Our network of RamseyTrusted pros will walk you through exactly how much home insurance you need and help you choose the right coverage—from dwelling to personal property all the way to liability and additional living expenses. They can even check if you can save any money by bundling home and auto insurance together.

And by the way, the value of your insurance policy won't automatically increase along with the value of your home, so it’s important to check up on your policy with your agent every year to make sure you have enough coverage.