How much homeowners insurance do I need?

Your home is your place of refuge. When storm clouds gather on the horizon — literally — having a good homeowners insurance policy will help you sleep easy at night. You’ll get peace of mind knowing that your home is safe. 

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That protection comes at a cost, though; an average of $1,311 per year in 2020, and even higher in some states like Florida ($2,165) or Oklahoma ($2,040). You’ll want to make sure you’re getting the right value for your premium. Just as everyone’s individual living situations are different, so too are your coverage needs. 

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We’ll help you craft a plan to determine your own coverage needs so you can get the right amount of homeowners insurance for your family.  

Homeowners insurance: the basics

Homeowners insurance is generally required by most lenders if you’ve used your home as collateral for a mortgage or a home equity investment. It protects everyone — including you and your family — against financial losses related to homeownership. 

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Most people have a general idea of what homeowners insurance covers, but it actually applies to a lot more situations than you might think. Homeowners insurance generally covers you against four broad types of losses:

• Liability: This pays the medical bills for people injured on your property, like a passerby falling on your slippery sidewalk. It also pays for any damages if you or your family (including pets) damage other people or property, such as if your dog bites someone while out on a walk. 
• Dwelling: This pays to repair or rebuild your home if it’s damaged under a covered event. Homeowners insurance policies generally don’t cover flood or earthquake damage, which may be purchased as separate policies through specialty insurers. 
• Personal belongings: Most homeowners insurance policies cover 50% to 70% of your dwelling coverage amount for personal belongings. Some categories of items, such as computers or jewelry, may be capped to a certain limit unless you buy extra coverage.
• Additional living expenses (ALE): If you can’t live in your home while it’s being repaired or rebuilt, this will cover the cost of a hotel, rental, meals, etc., up to a certain limit. 

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To file a claim, you’ll need to have suffered some sort of damage (or “peril”) that’s covered by your policy. There are two general types of homeowners insurance: “open peril” and “named peril.” 

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A named-peril policy is cheaper but only covers things on a specific list of hazards, such as fires, windstorms, riots, etc. Eight in 10 homeowners opt for an open-peril policy, however, which is typically more expensive but covers any damage outside of specific exclusions, notably earthquakes, floods, mudslides, and sinkholes. 

How much homeowners insurance do I need?

There aren’t any one-size-fits-all answers for how much homeowners insurance you need. Instead, most experts recommend breaking it down into a series of steps based on the four main types of coverages that homeowners insurance policies provide: 

Assess your home's value

Experts recommend multiplying your home’s square footage by the current per-square-foot cost to rebuild a home. The national average home construction cost in 2022 was $153 per square foot, but this may be higher or lower depending on where you live. You can get more accurate estimates by contacting your local real estate or builders association. 

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You may want to adjust your estimate higher if your home has any unique features that may be more expensive to replace, such as:

• Metal roof
• Stone fireplaces
• Professional landscaping
• Energy-efficient upgrades
• Exterior structures like sheds, greenhouses, or ADUs

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For example, if you have a 2,000-square-foot home with a $20,000 solar panel array on your roof, you might consider purchasing $326,000’ in coverage: $306,000 (2,000 * $153) for your home and $20,000 for your solar panels. 

Evaluate your personal property

In a worst-case scenario where your home burns to the ground, a standard homeowners insurance policy will offer personal property coverage. You’ll need some sort of evidence when you file a claim, however. You won’t need exact receipts, but you will need some way to prove each individual item you lost, along with a rough estimate of its value. 

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This is obviously impossible if you’ve lost your belongings, which makes it crucial to prepare in advance by creating a home inventory. There are several good ways to do this:

• Use an app such as NAIC Home Inventory or Sortly.
• Take a video while walking through your home and narrating each item as you go.
• Create and regularly update a spreadsheet listing each item, date, and purchase price.

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You can complete the task faster by working in pairs with a spouse or family member or breaking it down into one room at a time. When you’re done, remember to back up your home inventory list in a few different places, so you have access to it from anywhere. 

Consider liability coverage

The liability coverage offered through your homeowners insurance policy is an underrated benefit. In addition to paying medical bills for anyone injured on your property, it also protects you and your family against losses and lawsuits when you’re off-property as well. If your laptop is stolen while you’re on vacation, for example, or if someone sues you because your dog got loose and caused a car accident, your liability coverage can step in to protect you up to your coverage limits. 

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It’s important to think about your risks when choosing how much liability coverage to buy. Experts recommend considering higher coverage amounts if you have a large breed of dog or a swimming pool — two common but statistically riskier liability situations. 

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Another strategy is to tally up your assets — including the value of your home, auto, investments, bank accounts, retirement savings, etc. — and make sure you have at least enough coverage to protect these things that may be taken away in a lawsuit. 

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Many people also consider purchasing umbrella coverage, a separate policy offering extra liability coverage beyond the amount provided by your car and homeowners insurance. It’s typically more affordable but requires you to purchase higher liability coverage limits on your auto and homeowners insurance policies first. 

Factor in Additional Living Expenses (ALE)

Most homeowners insurance also offers a degree of loss-of-use coverage if your home suffers a covered loss and you can’t live there temporarily while it’s being rebuilt or repaired. This will cover the cost of a hotel, short-term rental, restaurant meals, etc., up to your policy limits, which is typically 20% of your dwelling coverage limit. If you rent out your home for extra income, your ALE coverage may also reimburse you for the lost income. 

Special considerations that may warrant additional coverage

A standard homeowners insurance policy will protect you against many things, but most homeowners will need to consider additional coverage depending on their individual risks. Two of the most common specialty insurance products are flood insurance and earthquake insurance, which can be instrumental in helping ensure you’re protected against these catastrophic events. You can check your property’s flood and earthquake risk on publicly available maps provided by FEMA and the USGS.

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Most homeowners insurance companies offer an extra a la carte menu of coverage options that you may want to consider, known as “riders” or “endorsements.” Here are some of the most common types of endorsements available:

• Sinkhole: Homeowners in states like Florida, Kentucky, and Texas are more likely to encounter sinkholes, which are excluded by standard homeowners insurance. 
• Identity theft: If you’re worried about your identity being stolen, this rider can help give you some peace of mind that you’ll be covered against financial losses. 
• Wind and hail: Some insurers exclude this damage in hurricane-prone areas like Florida or hailstorm-plagued regions like Colorado unless you purchase an additional rider. 
• Inflation guard: Especially important if you plan to live in your home long-term, this rider automatically updates your dwelling coverage if your insurer doesn’t do this already. 
• Sewage backup: Most homeowners insurance policies don’t cover sewage that backs up into your home from municipal or septic systems without this added rider. 
• Replacement cost: Most homeowners insurance only covers your home’s actual cash value, which factors in depreciation and may not fully cover the cost of rebuilding your home. A replacement cost rider will pay the full cost, however, up to your policy limits.
• Scheduled personal property: If you own personal belongings valued higher than the specific coverage limits of your policy, such as jewelry, furs, antiques, or computers, you may consider purchasing a rider for additional coverage on these items. 
• Ordinance or law coverage: Especially useful for older homes, this covers the cost to upgrade your home to current building codes as required by law.
• Extended replacement cost: Also known as “guaranteed replacement cost,” this rider pays the full cost to rebuild your home, even if it’s higher than the limits of your policy. 

Understand the role of deductibles

Homeowners insurance, as with other insurance products, requires you to pay an out-of-pocket deductible before your coverage kicks in. You get to choose your deductible amount, which insurers generally offer at a few different price points between $500 and $2,000. You can save money on your premiums by choosing a higher deductible, but you want to make sure you’ll still be able to pay it if you ever need to file a claim. 

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Some types of homeowners insurance options charge separate deductibles based on a percentage amount. If you purchase a wind and hail deductible, for example, you may have to pay a deductible worth 1% to 5% of the damage amount in order for your insurer to cover the remaining 95% to 99%. Earthquake insurance deductibles may be higher still, commonly up to 20%. 

Final thoughts

You’ll need to purchase homeowners insurance before you take out a mortgage to buy a house, but it’s also a good idea to revisit your homeowners insurance each year at renewal. Take a few minutes to look over your existing policy to see whether your coverage amounts match your current needs. If you did a lot of home improvement projects during the year, for example, you may need to purchase extra coverage. Alternatively, some upgrades may make you eligible for discounts to lower the cost of your homeowners policy.

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It’s a good idea to check your rates each year to make sure you’re getting the best price on your coverage. Get a quote from at least three insurers, so you have a baseline for comparison. An insurance broker can also be especially useful in helping you sort out your options and coverage needs.