How Much Home Insurance Coverage Do You Actually Need?

Buying too much insurance wastes money. Buying too little could ruin you financially. The "Goldilocks" zone of insurance protection isn't a guess—it's a math problem.

Many homeowners make the mistake of insuring their home for its market value (what they paid for it) or its tax assessment value. Both are wrong. Here is how to calculate the actual numbers you need for your policy decals.

1. Dwelling Coverage (The Rebuild Cost)

You need enough coverage to rebuild your home from the ground up at today's labor and material prices. This is called the Replacement Cost.

To estimate this:

If local builders charge $150 per sq. ft. and your home is 2,000 sq. ft., you need at least $300,000 in dwelling coverage, regardless of whether you bought the house for $200k or $500k.

2. The 80% Rule (Co-Insurance)

Insurance companies have a strict rule: You must cover at least 80% of your home's replacement cost.

If your home costs $300k to rebuild, but you only insure it for $200k (66%), the insurer will penalize you on every claim, even a small kitchen fire. They will only pay the percentage of coverage you bought (66% of the repair bill), minus your deductible.

3. Liability Coverage (Protecting Your Assets)

This pays if someone sues you because they slipped on your icy driveway or your dog bit them.

• Minimum: Most policies start at $100,000. This is rarely enough.
• Recommended: $300,000 to $500,000. The cost difference is usually less than $20/year.
• High Net Worth: If your assets (savings + home equity) exceed $500k, buy an Umbrella Policy for $1 million+ in coverage.

4. ALE (Additional Living Expenses)

If your home burns down, it could take 12-24 months to rebuild. ALE pays for your rent, hotel, and restaurant meals during that time.

Make sure your policy covers ALE for at least 24 months. Some cheap policies cap it at 12 months, which might leave you homeless before your house is finished.

Additional Coverages to Consider

• check_circle Ordinance or Law: Pays to upgrade your home to current building codes during repairs.
• check_circle Water Backup: Essential for homes with basements or sump pumps.
• check_circle Scheduled Personal Property: For expensive jewelry, art, or camera gear.
• check_circle Extended Replacement Cost: Adds a 20-50% buffer to your dwelling limit in case construction prices spike.

Frequently Asked Questions