If a windstorm or flood sends a tree crashing through the roof of your residence, your home insurance company will cover rebuilding costs up to your coverage limit. However, as construction costs have surged some 35% since 2020, only 30% of homeowners have updated their insurance policies and coverage limits accordingly.

That’s why it’s critical that you assess — and periodically review — how much home insurance you need.

The calculation is more complicated than just the replacement cost of your home. In the event of a natural disaster or other loss, your home insurance coverage also pays for additional living expenses if you relocate during repairs, replacing personal property, and personal liability involving incidents on your property.

Let’s examine the factors that will help you determine the types and amount of coverage you need to protect your home.

Read more: What is homeowners insurance and why do you need it?

How much dwelling coverage do you need?

Dwelling coverage pays to repair damage to the main structure of your home. This includes walls, roofs, and floors or foundations, as well as built-in appliances and any attached structures like decks, inground swimming pools, and garages.

A standard homeowners policy covers 16 perils such as fire, some types of storm damage, vandalism, theft, explosions, and more. But there are notable exclusions too. For instance, homeowners in places like California or along the coasts that are at greater risk of earthquakes or other natural disasters can also add specific types of coverage such as flood insurance.

Ideally, your dwelling coverage limits should provide standard replacement cost coverage in the event your home is destroyed. A quick way to get an idea of the replacement cost value of your home is to multiply the square footage by per-foot estimates of local construction costs.

This estimate can vary significantly based on location, the market value of your home, and numerous other factors. For instance, Home Advisor, a site that uses aggregated data from contractors, puts the cost of building a home between $138,269 and $525,452 on average.

Read more: Actual cash value vs replacement cost coverage

Factors to consider in calculating your home replacement cost

The following are just a few factors that your insurance company uses to determine the replacement cost of your home.

• Square footage

• Attached structures such as decks and garages

• Structural improvements or renovations

• Number of bathrooms

• Style of home

• Roof and exterior materials

• Fireplaces or other custom features

The cost of replacing your home will vary based not only on the estimated cost of building materials and labor, but also whether the structure meets current building codes or has hard-to-replace features.

When you’re shopping for home insurance quotes, it’s important to know that some building costs may not be covered by standard home insurance policies. To ensure you have enough coverage for an older home or a custom build, the Insurance Information Institute advises adding an extended replacement cost coverage endorsement that pays anywhere from 5%-25% above your policy limits.

Read more: Home appraisal: How it works and how much it costs

Insurance coverage for other structures

Your homeowners insurance usually covers the auxiliary structures of your home, such as a detached garage, barn, above-ground swimming pool, or shed. This type of structure coverage is sometimes referred to as Coverage B on a home insurance policy.

It’s typically set at about 10% of your dwelling coverage limit. So, if you have an expensive build, like a custom apartment or studio in your backyard, you may want to increase your structure’s coverage.

If you don’t have any additional structures separate from the main home, you can request this coverage be removed from your insurance policy, but remember to contact your insurance agent to adjust your coverage if you add structures to your property later.

How much personal property insurance do you need?

Homeowners insurance also reimburses for personal belongings that are damaged or destroyed. These are the contents of your house such as furniture, appliances, and personal effects. Most home insurance policies set the personal property coverage limits at about 50% of your dwelling coverage.

However, if you have highly valuable items in your home such as jewelry or collectibles, this limit may need to be revised.

Use this step-by-step guide to determine the amount of coverage you might need.

Step 1: Complete a home inventory

Conduct an inventory of the contents of your home, camera, or smartphone in hand. For expensive or important valuables like electronics, furniture, collectibles, or jewelry, you’ll want to include the following information in your inventory.

• Name and descriptions of items

• Make, model, and serial number if available

• Purchase cost or estimated value

• Date and place of purchase

• Receipts if available

• Photo of item

Several apps, including a free one from the National Association of Insurance Commissioners, help you generate a digital home inventory to make this process easier. You should store a copy of your home inventory online in cloud storage or another location besides your home for safety.

Consider replacement cost coverage

Your stuff may be special to you, but similar to auto insurance, most insurance companies only reimburse for the actual cash value (ACV) of your personal items. That means if your belongings are stolen or destroyed, you’ll receive a payout for what those things are worth at the time, not the replacement cost value (RCV).

Because most valuables have significant depreciation, you’ll be on the hook financially for the difference unless you upgrade your homeowners insurance policy to include replacement cost coverage. For example, if most of your kitchen appliances are a decade or older, you might not receive enough money to replace those appliances with newer models.

Upgrade your perils coverage

It may seem obvious, but it’s worth the reminder that your belongings (and your home) are only covered under the perils or events specifically detailed in your homeowners policy.

You can ask your insurance company to broaden your coverage to “open perils,” which would cover other types of property damage not specifically listed as exclusions on your homeowners policy. This broader coverage is likely to increase your premiums.

Use scheduled personal property coverage for costly valuables

Personal property coverage may have specific limits for certain kinds of valuables, such as jewelry, antiques, clothing, or electronics. For instance, some insurance companies limit jewelry coverage to $1,500, which is probably not enough to cover an expensive heirloom piece or an authentic gemstone.

Some companies offer scheduled personal property coverage in the form of an endorsement or floating policy, which allows you to obtain insurance coverage on an item-by-item basis. However, to secure this coverage you may have to submit a professional appraisal.

How much loss of use coverage do you need?

Loss of use coverage, sometimes referred to as additional living expenses coverage (ALE), defers the costs of temporarily living elsewhere while your home is repaired.

Most insurance companies set this limit at 20%-30% of your dwelling coverage, but you should consult with a real estate expert to determine if that will be enough. Rental costs in your area may fluctuate significantly and you’ll also need to account for other expenses such as moving costs, renters insurance, and utilities.

How much personal liability coverage do you need?

Whether your dog took a bite out of a delivery driver or someone slipped on your snowy sidewalk, personal liability coverage covers costs associated with incidents on your property. Typically liability insurance will pay out for legal defense and damages up to your liability limits, which usually start at $100,000.

Personal liability insurance is essential to protect your financial assets if you’re targeted in a lawsuit, plus it can be especially helpful if you enjoy high-risk activities like hunting or skiing, have a swimming pool or trampoline, entertain frequently at your home, or have a dog. If any of those scenarios apply to you, you may want to consider the following add-ons to your personal liability coverage.

Medical payments coverage

Similar to coverage offered through auto insurance, medical payments coverage in home insurance (sometimes referred to as Coverage F) covers smaller expenses if someone is injured on your property without requiring fault to be found. Coverage limits are usually a modest $1,000-$1,500, but you can contact your agent to see what your insurer offers.

Umbrella policy

An umbrella policy is extra liability coverage that kicks in after your standard home liability limits have been exhausted. It usually offers broader coverage. To assess if umbrella insurance is worth the cost, consider how you use your home, any features of your property that present higher risk, and your net worth.

For example, if you have a large breed dog, frequently entertain, or have a swimming pool, an umbrella policy provides extra coverage to protect your finances.

Additional homeowners coverage to consider

If you have an older home or you live in an area prone to natural disasters, you may want to consider additional types of insurance, sometimes referred to as endorsements, riders, or add-ons, to fill coverage gaps.

Water or sewer backup coverage

Water backup coverage pays for common scenarios that could result in water damage, such as burst pipes, sump pump failure, or backed-up drains.

Flood insurance

This type of insurance covers storm surges and floods caused by overflowing bodies of water and is usually backed by the federal government but available through major insurers. A flood policy is separate from your homeowners insurance and has its own deductible.

Earthquake insurance

This insurance handles earthquake damage that’s not usually covered by standard policies and includes dwelling coverage, personal property coverage, and additional living expenses.

Service line coverage

This insurance covers the excavation and replacement of service lines for water, sewer, gas, and even electricity that can be buried under your property and extremely costly to replace.

Sinkhole coverage

It may sound obscure, but many regions in the US are prone to sinkholes which aren't covered by standard homeowners insurance policies.

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FAQs

1. Is homeowners insurance included in my mortgage?

If you have a mortgage, your lender will usually require you to carry home insurance, and the premiums will be part of your mortgage payment.

For most homeowners financing their homes and paying a mortgage every month, a portion of the payment is set aside in an escrow account to pay for insurance and property taxes. If you don’t have an escrow account, you’ll need to pay your home insurance premiums directly. And you’re responsible for paying any deductible, usually around $1,000, to make a homeowners insurance claim.

Read more: What is a mortgage, and how does it work?

2. What if the replacement cost of my home increases significantly?

Calculating the current replacement cost of your home to set dwelling coverage limits doesn’t protect you against inflation or value fluctuations in the real estate market.

One way to ensure your coverage doesn’t fall short of your future financial needs is to get an inflation guard endorsement on your policy, which automatically raises limits to keep pace with inflation.

3. How often should I update my homeowners insurance policy?

Unless you’re doing a major remodel or renovations, the Insurance Information Institute recommends an annual review of your homeowners insurance policy to make sure your coverage is up to date and to make any changes to your home inventory to account for major purchases made during the year.