How much homeowners insurance do I need?

THE SIMPLE DOLLAR • BY CYNTHIA PAEZ BOWMAN

Homeowners insurance is essential to protect what may be your most valuable asset — your home. But many people ask themselves, "how much homeowners insurance do I need?" It's a valid question — buy too much and you're wasting your hard-earned money. And if you don't get enough coverage, you'll be wishing you had more after the fact. Fortunately, there are some simple ways to figure it out. Follow along to learn how to calculate "how much home insurance do I need?"

Different home insurance coverages

It's time to brush up on your home-insurance speak. Let's break down how home insurance works to figure out what exactly you're paying for.

Dwelling coverage: Covers the home's structure, such as the walls, roof and other buildings or structures on the property. It's the portion of your home insurance that covers the cost of rebuilding or repairing your home if it burns down, for example.
Personal property coverage: Covers your belongings within the home. Kitchen cabinets, flooring, furniture and other items are considered personal belongings. A good rule of thumb for deciding what personal property you have is to consider everything within the four walls and roof of your home.
- Actual cash value: If you file a claim, you'll receive the current market value of the item, with depreciation and age deducted from the original purchase price. It may be harder to replace something you lost unless you find a second-hand version of it.
- Replacement cost: If you file a claim, you'll receive enough money to buy a new version of the lost items. Replacement cost is more expensive but is much easier to deal with in a claim.
Personal liability coverage: Gives you financial protection for legal proceedings and the money for a defense if someone is hurt or suffers damages to their belongings on your property.
Loss of use: Pays for your living expenses if you're unable to inhabit your home.

How much coverage do I need for home insurance?

Now that you have an idea of all the moving parts of a home insurance policy, it's time to answer the most common question: "How much homeowners insurance do I need?"

Dwelling

Figuring out the dwelling coverage amount may be the hardest. Some people figure the home's market value is the answer: "Zillow says my home is worth $400,000, so that should be my dwelling amount." Unfortunately, that isn't how it works. Your dwelling cost should be the actual cost of rebuilding your house from scratch if it was burnt down to the ground.

Your home's value may be higher or lower than the actual cost of rebuilding it. For example, if you live on a hillside, rebuilding your house may be far more expensive than a beachfront property built on a flat parcel. A house on a slope may require proper foundations to be set, erosion accounted for and addressed, and more. Chances are, a beach house's resale value is higher than a rural hillside home, but rebuilding the beach house may be easier and cheaper.

To calculate the dwelling amount, do some research on what the average cost per square foot of rebuilding a home is for your area and multiply it by your square footage. Your insurance agent may suggest adding 10-20% to the estimate to be safe.

Personal property

Personal property — AKA your stuff — is easier to set a number on, although it takes time to arrive at a total. Most insurance companies will designate 50-70% of your dwelling's declared value for your personal property. For example, suppose you have a dwelling amount of $500,000 to rebuild your home. In that case, your policy may set your personal property to $250,000 to $350,000 total.

To confirm the limit is enough, do a walkthrough of your home, listing your contents, including the materials used, such as granite countertops or stainless steel appliances, and assign a rough value. While you're at it, take a few extra seconds to do a video tour of your home or photograph your more valuable goods. If you ever suffer a loss, having photo or video evidence of the contents of your home (and their condition) will help you speed the process along and get paid faster. Don't go overboard on valuing your goods — you may need to present receipts for the items if you ever file a claim.

Add up the values for a rough idea of your personal property amount. If you fall within your policy's limits, you're good to go. But if your home's contents are higher than 50% to 70% of your rebuilding costs, you'll need to speak with your insurance company.

Also, note that most insurance companies set other limits on personal property value. Suppose you have a few high-value watches, an expensive engagement ring, a designer bag obsession, a significant amount of electronics and computers or an art collection. In that case, you'll need to buy a scheduled personal property endorsement, even if the items don't go over the personal property limits. The endorsement names and lists the expensive items. Your insurance company may ask you to have the goods professionally appraised to determine their value.

Personal liability

As mentioned, personal liability insurance is more focused on legal and financial protections. If someone is hurt in your home or their property is damaged, personal liability coverage steps in to pay their medical bills or cover the cost of a lawsuit judgment, as well as pay for your legal fees (within limits).

Lawsuits are expensive these days. It's not unheard of that someone could win a five- or six-figure judgment (or higher) if a homeowner's dog bites them or they slip and fall when visiting. According to Marsh Private Client Services' personal liability coverage estimator, you may want to bump up the amount if:

You host parties and dinners at your home regularly, increasing the odds a guest can get hurt in your home.
There's a trampoline or pool on your property. You may be liable even if someone wasn't invited to use them.
You're worried about what your teens say on social media, which could be considered libel or slander.
You have dogs, especially breeds considered to be more aggressive and bite.

Tips on getting the best home insurance coverage

Choosing the best home insurance coverage is often based on finding the right coverage at the right price. Once you know "how much home insurance do I need", it's time to search for the best and cheapest homeowners insurance. Four ways you can save on coverage are:

Shop around: To find the best value, get quotes from several top home insurance companies to compare rates and coverage options.
Raise your deductible: A homeowners claim should hopefully be a rare occurrence. Therefore, raising your deductible to $1,000 or more could save you enough on your premiums over time to make it worthwhile. Consider an amount equal to the higher deductible in an emergency savings account, so you're not financially strapped if you have to pay the deductible.
Stay on top of changes: Do a homeowners insurance audit every couple of years. Look for changes in building costs in your area to adjust your dwelling policy limits. Review if you've added more high-value items (or sold some) and adjust your personal property amounts accordingly.
Bundle insurance: If you're happy with your home insurance company, insuring your vehicles with the same company could earn you a decent discount on both home and car insurance. Not to mention, it will simplify your life when it's time to pay your premiums or find your coverage declarations.

This article was written by Cynthia Paez Bowman from The Simple Dollar and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.