How Much Home Insurance Do You Need?

When it comes to buying homeowners insurance, it’s important to ask the right questions.

Which carrier is the best for me? What’s my cheapest option? What discounts do I qualify for? Can I bundle my home insurance and auto insurance together?

These are, undoubtedly, important questions to answer. But in most cases, one of the first questions you should answer is: How much coverage do you need?

Once you know the answer, you’ll be in a much better position to find the carrier and policy that meets your needs.

Below, we take a closer look at the different types of homeowners insurance coverage and offer recommended coverage amounts based on industry standards. We also explain what replacement cost is in home insurance and why it’s important to know whether your policy covers you for replacement cost or actual cash value.

What does homeowners insurance cover?

Before diving into how much insurance you need, it’s first important to recognize that your policy provides a number of different types of coverage, each of which is used for different types of losses, and each of which has its own coverage amounts and limits.

Dwelling coverage

Dwelling coverage, also sometimes called structural coverage or replacement cost coverage, is the portion of your policy that covers the physical structure of your house. If your home (or a portion of it) becomes damaged or destroyed due to a covered event, this coverage will kick in to help you with the costs, once you have met your deductible.

Recommended coverage amounts:

It’s typically recommended that you purchase enough coverage to rebuild and replace your home in the event that it’s completely destroyed.

It’s important to note that this amount, known as your replacement cost, may be higher or lower than the amount you originally paid for your home and could also differ from its current market value. If you financed your home with a mortgage, your lender may require coverage that matches your replacement cost, but even in situations where it is not required, it’s usually a good idea.

Other structures coverage

Other structures coverage is the portion of your policy that covers detached structures on your property. This can include freestanding structures like a fence, storage shed, detached garage, guest house, swimming pool, and more. Structures that are attached to your home, like a deck, would typically be covered under your dwelling coverage (above).

Recommended coverage amounts:

Basic homeowners insurance policies will often provide other structures coverage equal to 10% of your dwelling coverage limit, but this can vary based on the insurer.

As an example, if your home is covered for $400,000, then your policy will most likely start with $40,000 worth of coverage for other structures. Whether or not this is enough for you will depend on the types of structures you have or plan to have built on your property. Think about the cost to repair or replace these if they were to become damaged or destroyed, and consider adding additional coverage if these costs would exceed your basic coverage.

Personal property coverage

Personal property coverage covers the property that is stored in your home or a covered vehicle. It can include everything from jewelry and electronics to furniture and clothing and everything in between (note that it doesn’t cover business property.) It kicks in when your personal belongings are damaged or destroyed due to a covered event.

Recommended coverage amounts:

Homeowners insurance policies typically provide personal property coverage equal to 50% of your dwelling coverage limit, but your needs may differ. Depending on how expensive your personal property is, this may not be enough to replace all of your belongings if they are lost during a catastrophic covered event. If coverage limits don’t meet the cost to replace your property, you might consider insuring your property at replacement cost. Likewise, for particularly expensive items like jewelry or collectibles, you might consider scheduling your personal property, which allows you to buy additional coverage for specific items.

Liability coverage

Liability coverage is designed to help you pay for lawsuits and legal fees related to personal injury or property damage that occurs on your property. A common example includes when a guest slips and falls on your icy sidewalk.

Recommended coverage amounts:

Most standard policies provide a minimum liability coverage of $100,000. With medical costs rising, however, higher amounts are often recommended (a typical policy bought through Matic includes $300,000 of liability coverage).

As a rule of thumb, if the value of your savings, investments, or property exceeds your liability coverage, it’s a good idea to purchase enough coverage to protect those assets. You should also consider purchasing more liability coverage if you have a pool, trampoline, or other security hazards on your property.

Additional living expenses coverage

Additional living expenses coverage, or loss of use coverage, helps you cover the cost of finding other living arrangements when your home is damaged or destroyed due to a covered event. This can include the costs of renting a home, hotel, or motel, and may even be used to cover meals and storage expenses.

Recommended coverage amounts:

According to the III, many basic homeowners insurance policies provide additional living expenses coverage equal to 20% of your structural coverage limits, but amounts can vary by carrier and policy. In most cases, this is a good target to aim for.

What is replacement cost in homeowners insurance?

By now, you’ve heard us refer to replacement cost a few times in this guide. If you aren’t familiar with insurance lingo, you may be scratching your head in confusion.

Replacement cost actually has two different meanings, depending on whether you are talking about your personal property or your home.

Replacement cost and personal property

When it comes to personal property, replacement cost is the amount of money it would take to replace an item that is damaged, destroyed, lost, or stolen during a covered event. This differs from the actual cash value of your belongings, which is determined by factors such as depreciation. If you want to be sure that you can replace your belongings in full after a covered event, consider insuring them at their replacement cost and not their actual cash value.

Replacement cost and your home

When it comes to your house, replacement cost is how much money it would take to rebuild your home after it’s destroyed — using today’s codes, material costs, and labor costs. Because building codes tend to get more strict over time, and because material and labor costs rise with inflation, your home’s replacement cost may be significantly higher than the price you originally paid for your home.

Homeowners insurance policies typically provide coverage at your home’s replacement cost by default. But knowing that this cost will rise over time, it’s important to periodically revisit your coverage amounts to ensure that you always have enough to rebuild in the event of a catastrophic loss. (Note: Many insurers automatically calculate your new replacement cost when you renew your policy, but it’s a good idea to check this).

Replacement cost and your roof

Your roof is one of the most important parts of your home, and its replacement cost is a key part of your overall coverage. Replacement cost means your policy will cover what it takes to repair or replace your roof with materials of similar kind and quality at today’s prices, no matter its age or condition.

In contrast, actual cash value coverage factors in depreciation, meaning the older your roof, the less your insurer will pay out. This can leave you with significant out-of-pocket costs if your roof needs replacing after a covered event.

Because roofs are especially vulnerable to weather and other risks, it’s smart to review your policy regularly to ensure your coverage aligns with current replacement costs. Opting for replacement cost coverage provides greater peace of mind and helps ensure you’re protected.

Replacement cost coverage

As noted above, homeowners insurance policies will typically cover your dwelling at its replacement cost. That being said, your carrier may also offer a number of other replacement cost coverage options you can add to your policy, such as:

Extended replacement cost coverage

Extended replacement cost coverage provides an extra layer of protection for your home by increasing your dwelling coverage limit by a specified percentage, which can vary depending on your policy and carrier. This additional coverage acts as a financial safety net, especially in situations where the cost to rebuild your home exceeds your original dwelling limit.

For example, if your dwelling coverage is $400,000 and you have extended replacement cost coverage at 25%, your policy would cover up to $500,000 to rebuild your home. If rebuilding costs rise to $475,000 due to unexpected factors, like inflation or increased labor and material costs, this endorsement ensures you’re still covered.

A significant reason to consider extended replacement cost coverage is its ability to serve as a buffer against inflation and surging construction costs. After a widespread disaster, demand for materials and labor often skyrockets, driving up rebuilding expenses. Without this additional coverage, you could face significant out-of-pocket costs to restore your home.

Adding extended replacement cost coverage to your policy is a smart way to protect yourself from unforeseen price hikes and give yourself peace of mind knowing your home can be fully rebuilt. Matic includes extended replacement cost coverage as part of a typical home insurance policy.

Guaranteed replacement cost coverage

A guaranteed replacement cost endorsement is designed to fully cover the cost of rebuilding your home, regardless of how much that cost might exceed your dwelling coverage. This is usually the most expensive option, due to the comprehensive coverage it offers. (Note: Some insurers do place an upper cap on how high this coverage can go).

Scheduled personal property

Insuring your personal belongings at replacement cost will make it easier to replace them in the event of a covered loss than if you insure them at actual cash value. Does the value of your personal property exceed the limits offered by your policy? Consider adding a scheduled personal property rider that offers additional coverage to specific items that you list on your policy.

Other riders

It’s important to remember that your homeowners insurance policy only provides coverage for damage resulting from covered events. Many potentially destructive events — such as flooding, earthquakes, wildfires, and more — are typically excluded from coverage. If you’re worried that your home might be affected by these events, consider purchasing additional coverage in the form of a rider like:

• Flood insurance
• Earthquake insurance
• Water backup coverage
• Building code coverage
• Business property coverage
• Identity theft coverage

How much homeowners insurance do you really need?

As a rule of thumb, it’s recommended that you carry enough homeowners insurance to fully rebuild your home if it’s destroyed. This is often referred to as your home’s replacement cost. Beyond that, whether you need additional coverage — such as extended or guaranteed replacement cost coverage, scheduled personal property, or other endorsements — depends on your individual needs, risk tolerance, and budget.

Not sure what’s right for you? A licensed advisor from Matic can help. They’ll work with you to evaluate your home’s unique features and ensure your policy provides the right level of protection.