Home insurance by home value: What to know

If you’re like most homeowners, your house is more than just a valuable asset. It’s almost like another member of your family, and you want to ensure it’s protected. Homeowners insurance can help you do that, by providing funds to repair or rebuild your home in the event of a covered loss, like a wildfire or hailstorm. 

Many homeowners struggle with knowing how much insurance coverage to buy, though. Some people choose home insurance policies based on the value of their home, but that may not be enough. Let’s walk through how to choose the right coverage amount so you can sleep easier at night knowing you’re protected. 

Is it enough to insure just the value of your home?

Many people think they only need enough coverage to match the value of their home. It’s easy to see why people might think this way, but insurance experts say this can leave you dangerously underinsured. 

Consider this: if your home is declared a total loss, it’ll cost far more to demolish, plan, and rebuild your home from scratch than its actual value right now, if you sold it. Major natural disasters can make material and labor costs skyrocket even higher. 

Being underinsured is much more common than you might think. For example, one study of the 2021 Marshall Fire outside of Boulder, Colorado, showed that most homeowners — 74%, to be precise — were underinsured. The insurance payouts weren’t enough to cover the cost of rebuilding their homes. 

How does insurance protect the value of your home?

A standard homeowners insurance policy protects more than just your home’s structure. It shields you from other costs that can arise when you own a home, too, like if someone is injured while visiting your home for a backyard BBQ. In fact, home insurance policies are generally broken up into the following coverage types:

• Dwelling: Covers the structure of your home. Most policies are written with replacement cost coverage, which pays the full price to repair or rebuild your home, up to your policy limits. 
• Personal liability: Covers personal legal problems both inside and away from your home, such as lawsuits, accidental injuries, and property damage. 
• Personal property: Covers personal belongings, even if you lose them or they’re stolen outside of your home. Coverage limits are usually based on a percentage of your dwelling coverage. Insurers may reimburse you based on an item’s replacement cost or the actual cost, which takes depreciation into account for a lower overall payout. 
• Detached structures: Covers outbuildings that aren’t attached to your home, like sheds, greenhouses, and detached garages. 
• Additional living expenses: Covers living expenses if you can’t live at home while it’s being repaired or rebuilt. 

What factors determine your home insurance needs?

How much home insurance you need depends on a few different factors. 

Lender requirements

If you still have a mortgage, most lenders will require that you carry at least enough dwelling coverage to pay off your remaining mortgage balance. If you don’t have a mortgage or other home debt, you don’t technically need home insurance—but that’s a big risk and generally not recommended. 

The 80% rule

Another thing to consider is the 80% rule. Most insurance companies will cover the full cost when you file a claim, as long as it’s higher than your deductible (i.e., the out-of-pocket portion you pay before your coverage kicks in). 

But if your policy doesn’t cover at least 80% of the cost to rebuild your home after a total loss, they won’t fully cover any smaller claims, either. Instead, you’ll receive a reduced payout. 

Your actual needs

Most financial experts and insurance agents agree that it’s better to choose your home insurance policy based on your actual needs, rather than what’s required by lenders or anyone else. 

Here are some factors to consider:

• Your assets: Experts recommend carrying at least enough personal liability coverage to match your assets, including the value of your home and retirement savings, in case of lawsuits. Consider umbrella insurance if you need extra liability coverage. 
• Where you live: A standard home insurance policy doesn’t cover damage from floods, earthquakes, landslides, or mudslides. It’s wise to consider purchasing supplemental coverage if you live in an area prone to these hazards. 
• Your belongings: Some insurers offer extra coverage for specific valuables like furs, jewelry, or electronics, to ensure they’re covered in a loss. 
• Your home’s age: Older homes may come with greater insurance needs, since payouts may not be enough to fully cover the cost of replacing a roof or rebuilding the home to match current building codes. You may need to pay extra for replacement cost coverage or building and ordinance coverage.
• Your comfort level: Insurers offer add-on riders that help ensure you have enough coverage regardless of future affordability challenges, such as inflation guards or extended replacement cost coverage.

How to estimate how much homeowners' insurance you need

Instead of determining your home insurance needs based on the value of your home, experts recommend taking a more thoughtful approach to ensure you and your home are fully protected. 

Here’s what to do:

1. Check your home’s square footage: All things being equal in a given area, the size of your home has the biggest impact on your rebuilding costs because it dictates the amount of building materials and labor you’ll need. 
2. Check your local cost to rebuild: Reach out to local real estate groups or construction companies to gather information on rebuilding costs in your area, on a square-footage basis. 
3. Calculate your dwelling coverage needs: Multiply your home’s square footage by the per-square-foot rebuilding costs you estimated in the previous step. If you have a 2,000-square-foot home, for example, and it costs $160 per square foot to rebuild in your area, then a limit of $320,000 would provide sufficient dwelling coverage. 
4. Consider other coverage types: Homeowners insurance doesn’t just protect your home, and insurers offer many options that can help with other possible risks, too. It’s a good idea to consider other insurance types, riders, and endorsements depending on where you live, your financial situation, and what you own. 

Final thoughts

Determining your home insurance needs based on the value of your home will likely ensure that, at the very least, you’re meeting the terms of your mortgage contract (if you have one, that is). It’s likely not enough if something catastrophic happens, though — and that’s the whole point of having home insurance in the first place.

Instead, it only takes a few minutes to estimate the cost to rebuild your home and any other insurance add-ons you might need. Experts recommend using this approach instead because it’ll help ensure that no matter what happens, your home will be protected. 

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