Here's How Much Homeowners Insurance You Need

Having too little homeowners insurance could be a costly mistake.

Buying homeowners insurance is important for anyone who owns their own property. 

Mortgage lenders require homeowners insurance in order to protect their collateral (the house that secures the loan). Even homes with no mortgage should be insured because people have so much of their net worth wrapped up in their houses. 

But, how much homeowners insurance should a property owner buy, exactly? This guide will help owners decide the amount of coverage they require. 

Replacement value coverage

Every homeowner should have enough insurance to rebuild their house if something were to happen to it. 

This means they need replacement coverage insurance, not market value insurance. Market value coverage only pays what the property is worth at the time something happens to it. That might be less than it costs to rebuild it.  

No homeowner wants to see their house destroyed by a covered loss, only to find they can't rebuild what they had because they don't have enough replacement value coverage. So be sure policy limits are high enough to provide plenty of money to get back the house that was lost. 

Personal property coverage

Homeowners need personal property coverage as part of their home insurance. This pays to replace things in the house that were destroyed by a covered cause. 

Homeowners should again get replacement value coverage, rather than market value coverage, because otherwise they could end up with far less than they need to replace their stuff. After all, the insurance payout on a 10-year-old couch or TV probably wouldn't be enough to buy a new couch or similar television, since these assets depreciate (go down in value) quickly. 

Homeowners need to make sure they have a sufficient amount of property coverage to pay to replace all they own. Since it's helpful to have a home inventory in case an insurance claim needs to be made, homeowners can prepare one to help them estimate the amount of coverage required. 

Liability coverage

Homeowners should have liability coverage, which pays out if the property owner is sued because someone is hurt on their space. Typically, it's a good idea to have a minimum of around $500,000 in liability coverage because this would cover most serious injuries. 

Homeowners with a lot of assets or high incomes may want to opt for more liability coverage to provide full protection for assets. Those who don't have sufficient insurance coverage could be forced to pay out of pocket if an injured victim sues them for damages personally that their insurance doesn't cover because the losses are above the policy limits. Wealthy people with lots of assets and income could be more vulnerable to this kind of lawsuit.

Other add-ons

Finally, many homeowners should also add additional policy provisions, such as additional living expense coverage. This would pay for costs incurred if the homeowner experienced extra expenses associated with a covered loss. For example, this kind of insurance would pay for added costs of a rental property while a home is being repaired when something has gone wrong. 

By making sure to have these kinds of coverages in place, homeowners can get the insurance they need to protect themselves against major financial losses if something goes wrong with their house and its contents.