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How much homeowners insurance do I need? It's a question everyone who owns a property needs to consider. Insurance protects you from catastrophic losses if something happens to your property or if someone is hurt on your property. This guide explains the types of coverage you need and helps you determine how much protection to buy.
What is homeowners insurance?
Homeowners insurance protects against losses if something goes wrong at your home. It pays if your home or property are damaged or destroyed by an event that your insurance policy covers, such as a fire or burglary. If someone sues you after an injury at your home, homeowners insurance covers those costs.
Lenders generally require homeowners insurance as a condition of obtaining a mortgage loan. You may want to buy more coverage to protect against financial losses.
Homeowners policies typically cover:
- Your residence: If your home is destroyed or damaged, your policy pays to rebuild the structure.
- Other structures: Insurance usually extends to sheds, barns, or other structures attached to your property.
- Personal property: This includes furniture and other items in your home. Your insurer pays to repair them or for their value if they're stolen or damaged.
- Liability: If someone is hurt on your property or injured by your pets, your policy pays for damages if they make a claim against you.
Homeowners policies typically do not cover:
- Flood damage: You need separate flood insurance for your home or property.
- Sewer backup: You need add-on coverage to pay for repairs and damage.
- Jewelry: Your policy may have limited or no coverage. For example, your insurer may replace up to $1,500 of jewelry stolen or damaged by a covered event.
- Antiques and collectibles: Valuable antiques or collections are usually excluded, or coverage is capped at a small amount.
How much homeowners insurance do I need?
Mortgage lenders set requirements, or "scope of coverage rules," for insurance. You must meet your lender's minimum requirements for insurance.
Don't wait too long to find out your lender's insurance requirements. Your lender may require proof of insurance at closing, as our first-time home buyers guide explains. Also, you may have to make payments into an escrow account, which your lender uses to pay your home insurance policy premiums.
You also can purchase additional coverage. This protects you from out-of-pocket costs, and may be a smart choice. Here's how to decide what insurance coverage you need:
- Dwelling coverage: Your policy should be large enough to repair or rebuild your home if it's damaged or destroyed.
- Personal property coverage: Most policies allow you to insure contents up to 50% to 75% of your home's value. Document your home's contents in case you must make a claim. And consider the cost to replace property when deciding how much coverage to buy.
- Liability coverage: This will pay for legal costs and damages if you're sued because of an injury on your property. Most policies offer a minimum of $100,000 in coverage. You may wish to buy as much as $300,000 to $500,000 or more if you have a lot of assets to protect.
- Additional living expense coverage: This optional protection covers living costs of between 10% and 20% of your home's value if you're displaced due to a disaster. It can include temporary rent, pet boarding, or restaurant meals.
- Additional coverage types: Flood insurance, fire insurance, protection against sewer backup, or a jewelry or art rider may be necessary if you face added risk.
If you aren't sure how much the insurance will cost on top of your mortgage payments, you can use a mortgage calculator.
Homeowners insurance deductibles
Homeowners' policies typically have deductibles. This is the amount you pay before your insurer begins covering losses. The higher your deductible, the lower your premiums but the more you pay if a covered event occurs. Consider your risk tolerance and emergency savings when choosing a deductible.
Replacement cost vs. actual cash value
When purchasing coverage for your dwelling, you may have a choice between replacement cost vs. actual cash value. Here's what that means.
- Replacement cost: Your insurer pays the amount necessary to rebuild your current home and purchase property similar to what you currently own. If you have a 10-year-old TV that's destroyed by a covered peril, the insurer pays for a new TV.
- Actual cash value: Your insurer pays the market value of your property, minus depreciation. Instead of providing funds for a new TV, your insurer reimburses you what a 10-year-old TV is worth if your TV is destroyed.
Most insurance policies provide replacement cost coverage for your dwelling by default. But they default to actual cash value coverage for personal property. If you want replacement cost coverage for both, you may need to customize your homeowners insurance policy. And you will likely pay higher premiums for the added protection.
How much does homeowners insurance cost?
The average cost of homeowners insurance is $2,305 per year according to The Ascent's research. However, costs are determined by the amount of coverage, location, and risk your particular property presents.
If there is a higher risk of loss -- perhaps because you've made repeated past claims or live in an area prone to certain kinds of risks -- you pay higher premiums. If you live in an area that presents fewer risks and you keep coverage limits low, you pay less.
When it's time to purchase coverage, head over to our step-by-step guide: How to Get Homeowners Insurance.
Still have questions?
Here are some other questions we've answered:
FAQs
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Your homeowners insurance needs depend on risk tolerance and the value of your property and assets. Most homeowners need:
- Dwelling coverage: Choose replacement coverage so your insurer pays the cost of rebuilding your home. Make sure your policy limits are high enough to fully rebuild.
- Personal property coverage: Consider replacement coverage so you're reimbursed to replace possessions. Actual cash value coverage provides only reimbursement for the current market value of your possessions. This may not be enough to buy new items.
- Liability protection: This protects your assets if a claim is made against you after someone gets injured on your property. The more assets you have, the more coverage you need.
- Other coverage types: You may need flood insurance, sewer backup insurance, add-on coverage for jewelry or collectibles, and additional living coverage (which pays costs if you're displaced from your home).
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Dwelling coverage pays to repair or rebuild your home if it's damaged or destroyed by a covered peril. Most policies offer replacement coverage, which pays the cost to rebuild your current home. Be sure yours does.
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Personal property coverage pays to replace possessions stolen or damaged by a covered peril. Most policies sell this coverage as a percentage of your home's value -- up to 50% or 75%. Consider the value of your property to decide how much coverage you need. And document your possessions in case you must make a claim.
You choose between actual cash value coverage or replacement value coverage. Replacement value policies are costlier. They provide funds to replace your possessions. Actual value policy provides funds equal to your property's diminished value. If you have a 10-year-old TV, replacement value coverage would provide money to buy a new TV. Actual value policies would pay what a 10-year-old TV is currently worth.
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Liability coverage protects your assets if a claim is made against you because of an injury at your home or caused by your pets. Most policies provide at least $100,000 in coverage. The more assets you have to protect, the more coverage you need. Many homeowners should consider at least $300,000 or $500,000 worth of protection.
If you have substantial assets, consider a separate umbrella policy. It stacks on top of your homeowners policy. It pays losses above the coverage limits on your homeowner's policy if a large claim is made against you. It's often less expensive to buy an umbrella policy than to add more liability coverage.
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Additional living expense coverage pays costs if you are displaced from your home due to a covered peril. It could pay for you to rent a comparable property while your home is rebuilt. Or it could cover restaurant meals if you have no kitchen, or boarding for your pets if they can't live in your temporary dwelling.
If you cannot afford to cover the costs of living outside your home in the event the property must be rebuilt, consider buying ALE coverage.
Our Mortgages Expert
Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.
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