How much dwelling coverage do I need?

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Insights:

Dwelling insurance is a standard part of a homeowners policy that protects your home if it’s damaged.

Home is supposed to be a safe place where you lay your head, where you can secure your most cherished belongings and shelter loved ones. However, it’s important to remember that disaster can strike at any time.

If you’re not prepared with the right home insurance coverage, you could find yourself on the hook for thousands of dollars worth of damage.

Here’s what you need to know about dwelling insurance, which is part of a standard home insurance policy, and what else homeowners insurance covers.

Key Takeaways

How much homeowners insurance to buy is one of the most important questions to answer as a homeowner.
Dwelling coverage handles your physical home.
When choosing a coverage amount for dwelling coverage, you should get enough coverage to rebuild your home — not how much your property is worth.
Homeowners should make sure they have enough coverage each year and increase dwelling limits as cost of living and real estate value rise.
Insurance companies may perform an on-site appraisal to figure out rebuilding cost and how much dwelling coverage you need.

What are the types of home insurance?

The average home insurance policy covers several basic forms of coverage that include dwelling, personal property, liability, other structures, and additional living expenses. Before you know how much insurance to buy, first you need to understand how each type of insurance coverage works.

According to Insurance Information Institute, homeowners insurance policies cover 16 types of perils that protect you from common losses, including these events.

Fire and lightning
Windstorm and hail
Explosion
Riot and civil commotion
Aircraft damage
Vehicle damage
Smoke
Vandalism and malicious mischief
Theft
Volcanic eruption
Falling object
Weight from ice, snow, and sleet
Accidental discharge or overflow of water and steam from specific household appliances
Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water heating system, an air conditioning system, or automatic fire-protective system
Freezing of a plumbing, heating, air conditioning, or automatic sprinkler system and household appliances
Sudden and accidental damage from artificially generated electrical current

Most homeowners insurance policies offer the following types of coverage.

Dwelling coverage

A critical part of a standard homeowners insurance policy is dwelling coverage, which protects the physical structure of your home. This includes things like the walls, flooring, ceilings, and built-in appliances.

Personal property coverage

Your home is full of personal belongings, like your furniture and clothes, so it is important to protect them with the right coverage.

Standard homeowners insurance policies cover personal property insurance, which handles common covered perils, like fires and hurricanes. It also can cover belongings that aren’t stored in your home with off-premises coverage. Other items typically covered include specific landscaping, such as trees, shrubs, and even your grass.

Not all of your belongings may be covered by personal property insurance. High-dollar items like jewelry, art, antiques, and furs often require a separate form of insurance known as valuables insurance.

Liability

Personal liability insurance protects against certain injuries that can occur within your home. If you have a visiting guest who is injured on your property, you could be liable for property damages and medical expenses resulting from the accident.

Instead, liability coverage, also known as bodily injury damage, protects you and your guests from specific types of accidents, as well as any injuries caused by the policyholder. Expenses that are usually covered include medical bills, funeral expenses, and lost income.

How much liability coverage you need is based partially on what you own. You want to make sure your home, cars, bank accounts, and other possessions can be protected by liabilty coverage if you get sued.

If you need additional coverage for liability, you can get separate umbrella insurance, which often has liability coverage has a coverage limit of up to $5 million.

Other Structures

Also included is coverage for additional structures that are on your property but unattached to your home’s structure, such as your garage, shed, or gazebo.

Additional Living Expenses

Additional living expenses (ALE) coverage pays for certain costs should your home become inhabitable from a covered loss. Exact items for reimbursement vary based on your provider, but this usually covers meals, lodging, and other living expenses you may face when your home is inhabitable.

What does dwelling coverage not cover?

Certain events and damages are exempt from the typical homeowners insurance policy. These exclusions can include these:

Floods: Flood insurance typically requires a separate policy. However, many insurance companies don’t issue flood insurance directly, so you may have to purchase a separate policy from the National Flood Insurance Program (NFIP).
Earthquakes: Earthquake insurance is also often sold as a separate policy. To see if you live in an affected area, you can check the hazard map and other resources available from the Federal Emergency Management Agency (FEMA).
Sewer backups: A sewer backup is not only disgusting, but damages can cost thousands of dollars. While not included in the average policy, many insurers offer this coverage as an add-on, or rider, for your policy.
Inadequate or lack of maintenance: If you fail to maintain your home, your insurance provider may not cover associated damages resulting from neglect and an overall lack of maintenance.

When shopping for homeowners insurance, carefully consider what risks apply to your home and the corresponding coverage that can protect you.

Types of home insurance value

When choosing your home insurance coverage, you also have to choose the type of homeowners insurance value suitable for your property. This determines how your insurance company will handle losses and reimbursement.

Actual cash value

Actual cash value covers the price of your home and belongings, minus reasonable depreciation.

Replacement cost value

Replacement cost value doesn’t include depreciation, so you receive the full original value of rebuilding your home and replacing possessions.

Guaranteed replacement cost

Guaranteed replacement cost coverage provides the most security, covering your home and personal property based on today’s costs for replacement. Coverage accounts for inflation, providing reimbursement for what replacement will cost today. This can exceed the value of the policy within limits, usually anywhere from 20% to 25% beyond your policy’s limits.

Coverage may be restricted to certain areas and providers.

QuickTake

What is dwelling coverage and how much do you need?

Is hazard insurance the same as homeowners insurance?

How much dwelling coverage do you need?

How much homeowners insurance do you need is one of the most important questions to answer as a homeowner. That includes how much dwelling coverage to buy, also called the dwelling coverage limit.

It’s important to ensure that you have adequate homeowners insurance coverage to protect against financial losses in the future.

The amount of dwelling coverage depends on several factors, including:

The cost to rebuild your home
The type of materials involved in rebuilding
Whether you want to use green materials
Local demand at the time of rebuild

To best understand how much dwelling coverage you need for today’s market, we look to the experts themselves.

Martin Boonzaayer, CEO of The Trusted Home Buyer, makes an important observation about the current real estate market.

“The recommended coverage is now higher than ever. The reason is that now homes cost more than ever. With the median house value in America now around $400,000, it is recommended that dwelling coverage covers $300,000-$500,000, about the same value of a home,” Boonzaayer says.

Jaime Arias, a licensed insurance agent at Dynamic Insurance Solutions, offers general coverage amounts.

“The limits for personal liability insurance are generally $100,000, $300,000 or $500,0000. Since the liability coverage portion of the policy is usually very inexpensive, I recommend clients get at least $500,000 of liability coverage,” Arias says.

However, average amounts aren’t always enough, explains David Adler, president and owner of Denver’s Adler Insurance Group.

“There is no set dollar amount or specific recommendation that we provide to homeowners regarding their dwelling coverage. This is because every home is different, and you need enough homeowner’s insurance to cover the costs of rebuilding your home if it’s destroyed. For instance, a three-bedroom, three-bath home will likely have more dwelling coverage than a two-bedroom, one-bath residence because it would cost more to reconstruct that property,” says Adler.

Have enough dwelling coverage to rebuild your home

David Aylor, founder & CEO of David Aylor Law, says dwelling coverage needs to be high enough that the payout will be enough to replace your home. This means that over time and with rising home values, your dwelling insurance coverage should increase to meet them.

Blaine Thiederman, founder, CFP, and principal advisor at Progress Wealth Management, says one mistake that many homeowners make is not increasing their home insurance’s dwelling limits with cost of living and real estate value increases.

“Just this year, the cost of living in most cities increased at least 6%,” Thiederman says.

Instead, he makes a suggestion. “Typically, the easiest and most accurate way to ensure proper dwelling limits is to hire a builder [who can] estimate the cost of rebuilding your home,” he says. “Have them estimate at least 5-10% above what they believe it would cost immediately to rebuild it. The reason why you may want to estimate 5-10% above is because natural disasters happen. If that disaster destroyed thousands of others simultaneously, the materials to rebuild may skyrocket due to an unexpected demand spike.”

Robert Raymond, vice president of Private Client Advisors with HUB International, agrees. “The best insurers provide you with an on-site appraisal which determines your exact rebuilding cost, finds all policy credits you would qualify for, and notes any areas of concern you may want to address.”

However, Adler warns that your home’s value isn’t the same as rebuilding costs. So you want to keep that in mind.

“To estimate the costs of reconstructing your home, take the square footage of your property and multiply it by local construction costs per square foot, Adler says.

There is also the matter of your insurance policy declarations page, says Dr. Alan Himmel, PCA, of All Star Adjusting.

“As an insurance adjuster who represents only the insured, I have seen that the coverages that are listed on the declarations page are oftentimes misleading because they are changed by endorsements that the insured is not even aware of,” he reports.

“For example, you may have $500,000 in dwelling coverage which may be enough if your house burns down, but if your home is damaged by a water leak, there could be an endorsement on your policy that limits water damage to only $10,000. These losses are generally devastating to the insured because $10,000 in water damage coverage is almost never enough for even a basic kitchen loss caused by water.”

Your insurance agent or provider can help calculate the right coverage based on your specific property.

How much other home insurance coverage do you need?

Just as you need dwelling coverage, other vital types of coverage are important to carry for your home. However, the amount of other homeowners insurance coverage can vary.

Consider these amounts to best shop for home insurance for your property.

Personal property: Personal property insurance can range anywhere from 40% to 70% of your homeowners policy coverage.
Liability: While the average policy carries $100,000 in personal liability insurance, you should consider coverage of at least $300,000 to ensure you are fully protected.
Other Structures: Other Structures coverage is usually 10% of the value of the dwelling coverage. So, if the home’s value is $400,000, Other Structures coverage is typically $40,000.
Additional Living Expenses: Typically, additional living expenses coverage amounts to 20% of your dwelling coverage.
Medical Payments: Coverage for medical payments ranges from $1,000 to $5,000 for the average policy.

While these figures are a great place to start, it’s important to determine how much your property and belongings are worth in order to find adequate coverage. You can always ask your insurance company if it can offer additional coverage, which comes at a higher price.

When should you buy additional home insurance coverage?

Buy or renew your policy to prevent any unnecessary damages to ensure you have adequate homeowners insurance coverage at all times. Your policy should also be adjusted as soon as possible when you make changes like home renovations or the purchase of a new home.

You should also check on your policy periodically to update coverage based on changing markets and pricing. Talk to your insurance agent to ensure that you have the right amount of home insurance at all times for your evolving property.

“We all buy insurance not because of what we think is likely to happen but what might happen that could ruin our financial lives forever,” Thiderman says.

Frequently Asked Questions

What does a standard homeowners insurance policy cover?

Homeowners insurance consists of several protections that protect from common events like fire, theft, and smoke damage. This includes coverage for your dwelling, personal property, liability, other structures, and additional living expenses.

Your home insurance policy protects from personal liability so you aren’t responsible for damages and your insurance provider pays instead.

Do mortgage lenders require home insurance?

When you have a mortgage on your home, lenders require that you maintain a certain amount of homeowners insurance to protect against damages. With banks financially invested in your home, they want to be sure that there is adequate coverage in case of a total loss.

How can you save on dwelling coverage?

There are multiple ways to save on your dwelling coverage, including these recommendations.

Shop for discounts. There are multiple discounts available for homeowners insurance, including savings for having a burglar system and building materials.
Bundle your policies. When you purchase multiple policies from the same provider, you could receive extra savings on your insurance policies, including auto insurance.
Increase your deductible. When you increase your deductible, it lowers the cost that you pay each month for your premium. However, this means that you will need to pay more out-of-pocket should you experience a loss.
Improve your credit score. Many insurance providers use your credit score to assess risk, so by increasing your credit score, you could be rewarded with lower rates.

Finally, always shop around to be sure that you find the right coverage at the best price for your home.

Does dwelling coverage flood damage?

Dwelling coverage doesn’t include flood insurance. Instead, you will have to purchase a separate flood insurance policy from an insurance provider or the National Flood Insurance Program (NFIP).

Lena Borrelli

Contributing Researcher

Lena Borrelli is a freelance writer from sunny Tampa Bay who has worked with such leading industry titans as Gronk Fitness, Morgan Stanley, Wells Fargo and Simon Corporation. Her work has most recently been published on sites like TIME, Microsoft News, Bankrate, Investopedia, Fiscal Tiger, The Simple Dollar, ADT and Home Advisor.