How Much Homeowner’s Insurance Do I Need?

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Updated: 08 October 2023
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Insuranceopedia Staff
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Key Takeaways

  • Figuring out how much homeowner’s insurance you need is a balancing act between overpaying for coverage you don’t need and ending up with inadequate coverage.

One of the biggest risks of buying home insurance is not buying enough. As a homeowner, you want to make sure you have enough insurance to replace your home, personal belongings, and pay for alternative living arrangements in case of serious damage or disaster.

This can be stressful for a lot of people, especially first-time homeowners, but if you understand the insurance policy and keep a few key tips in mind, you should have no problems at all.

Read: 5 Keys to Homeowner’s Insurance for First Time Home Buyers

What is Home Insurance?

Home insurance is exactly what its name implies. It is an insurance policy purchased to cover your home and its contents from common losses like fire, theft, or other accidents and disasters. But to dive a little bit deeper, there are a few distinct coverage categories that you should know about.

A typical home insurance policy is broken down into several sections. Each providing unique coverage. Here are a few key ones every homeowner should know about:

  • Coverage A – Dwelling Building.
  • Coverage B – Detached Private Structures.
  • Coverage C – Personal Property.
  • Coverage D – Additional Living Expenses.
  • Coverage E – Personal Liability.

Read: Breaking Down Your Homeowner’s Insurance Policy, from Coverage A to Coverage E

Coverage A – Dwelling Building

The first coverage section is designed to insure your home itself. This includes the main structure that you live in as well as any attached structures like attached garages or porches.

It also includes things like your landscaping, pools or hot tubs, and other permanently attached outdoor equipment like swings, tree houses or sprinkler systems.

Coverage B – Detached Private Structures

This section insures any structures that are separate from the main building, including things like detached garages, sheds, pool houses.

Coverage C – Personal Property

This section insures your personal property both while inside and outside the home. This section offers global coverage, so if you lose a camera while on vacation overseas, your home insurance policy will still cover it.

There are limitations to how much coverage certain things like jewelry can get so be sure to check with your insurance provider to see what endorsements or additional coverage are available to you.

When determining how much home insurance you need, this is probably the section you will spend the most time on.

Read: A Guide to Insuring Your Personal Belongings

Coverage D – Additional Living Expenses

The Additional Living Expenses section is often overlooked by homeowners but is especially important. When your home suffers an insured loss and is no longer inhabitable, this coverage will pay for any additional living expenses you might incur to maintain your normal standard of living during the disruption.

This would include paying for things like a hotel stay, transportation, meals if you cannot cook in your new accommodation, and kennel time for your pets if they can’t stay with you at your temporary accommodations. This section also pays for any lost rental income from the home.

Coverage E – Personal Liability

Coverage E (Personal Liability) is also very important, as it covers your liability arising out of private activities anywhere in the world. Homeowners might use this coverage to pay for guests injured on their premises, accidental damage to a hotel room while overseas on vacation, or even if you accidentally break something valuable at a local store or friend’s house.

Read: Why You Need a Lot of Liability Insurance, Even if You’re Law-Abiding

Not only will the insurance company pay for any damages you might owe, but they will also take charge and pay for your legal defense if required, saving you the stress and headache of defending a lawsuit.

Insured Perils

Note that while the above are some categories of property that would be covered, the actual perils that are insured by your home insurance policy depend on the type of insurance you purchase.

How Much Homeowner’s Insurance Do I Need?

Now that you know about the key coverage provided by your home insurance policy, you need to figure out how much you need for each one.

Read: 10 Things to Know About Homeowner’s Insurance

How Much Insurance Do I Need for My Home?

For your home itself, the simple answer is to purchase enough insurance to completely rebuild your home in the event of a total loss. One common mistake people make is to purchase insurance equal to the purchase price of the home or the amount left on the mortgage.

One reason this is incorrect is that the purchase price of the home also includes the value of the land underneath the home, which is not really susceptible to loss. What you want to look at is the replacement cost of the actual building itself.

There are many ways to calculate this but the most common method is to calculate it on a per square foot basis using special software your insurance provider uses to provide a recommended value.

This calculator takes into account things like local labor and material costs, the cost of any upgrades that you have made, and the finishing and quality of the home. You can also get this information from an appraiser.

How Much Personal Property Insurance Do I Need?

This is a tricky one because most people underestimate this number. To get an accurate assessment of your personal property, first time home insurance buyers should do a personal property inventory going room by room logging each item inside and tallying up the cost on a spreadsheet.

While you do this, you should also take pictures of the items and consolidate any receipts to help you substantiate your claim in the future. If you identify particularly valuable items like collectibles, artwork, or jewelry during your inventory, you should speak with your insurance provider about getting separate coverage for these high-value items.

Read: Your Complete Guide to Home Inventories

For simplicity, some insurance companies will also base this number off of the rebuild value of the home that was set for Coverage A. The reasoning behind this is that a home that is more valuable will also likely have more valuable contents. If you do not have anything particularly valuable, this could be a good option instead of taking an inventory.

How Much Liability Insurance Do I Need?

The default option here is usually $1,000,000 but these days, $2,000,000 is getting more common due to the rising cost and frequency of lawsuits. The amount of insurance you should choose for this section really depends on your individual risk factors. If you frequently participate in hazardous activities or have something like a playground or swimming pool on your property, you should err on the side of caution and get more insurance.

Don’t Forget Inflation!

After you complete these steps and decide on home insurance limits you are comfortable with, you should also make sure to review your coverage and limits annually. Take into account inflation and changing circumstances such as major renovations that increase the value of the home.

Final Thoughts

Selecting the right amount of homeowners insurance gives you peace of mind that you are protected without overpaying. By going through these exercises and evaluating the correct value for your home and property, you are making sure you are getting the best home insurance coverage every time.

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