A lot of our readers come here looking for advice on finding the best home insurance value for their money — for an important reason. Saving on a quality home insurance policy feels good, especially if it’s a policy you’ll be keeping for years.
But there’s another component of your homeowners insurance that’s arguably even more crucial than swiping up a cheap homeowners plan: having the right amount of coverage. This side of the home insurance equation can leave homeowners feeling a little out of their depth.
We’ve covered home insurance pricing extensively in our home insurance costs guide. Today, we’re going to drill down into protections. And not just what HO-3 policies cover, but how much insurance you need to weather a claim stress-free.
Specifically, we’ll answer the following four questions many of our readers have:
- How much dwelling coverage do I need?
- How much coverage do I need for my possessions?
- How much additional living expenses (ALE) coverage is the right amount?
- How much liability coverage should I take out?
FYI: Five percent of U.S. homes file claims annually, according to the latest data from the National Association of Insurance Commissioners.1 Experts expect that number will go up over the next few years.
How Much Dwelling Coverage Do I Need?
Here’s a short story about dwelling coverage, which lets homeowners build back their homes in the event of a disaster.
In 2015, Lucinda and Niles finally ditched city life in Richmond, Virginia, for their dream home in the foothills of the Blue Ridge Mountains. The price they paid — $325,000 — was a little over budget, but they were happy with what they got: breathtaking sunsets, fresh air, and all the raspberries they could eat.
When they went online to shop for house insurance, Lucinda and Niles lucked out again. They scored a policy from one of the top names in the industry that was well below the state average. When the online quote generator asked them how much they wanted to insure their home for, they just plugged in the amount they’d paid to buy it.
Do you see where this is going?
In mid-2020, five years after Lucinda and Niles bought their home, a late-season storm blew in and knocked an old growth fir tree onto the garage, starting a fire that wiped out half the house. Lucinda and Niles were shocked to learn that: 1) in 2020 building costs had gone up; 2) there was more demand for contractors in the area; and 3) rebuilding their gorgeous mountain retreat to code wasn’t going to be cheap.
Bottom line? If they wanted their home back, Lucinda and Niles needed $125,000 over the $325,000 dwelling coverage cap they’d chosen back in 2015.
Homeowner's Tip: To get an idea of how volatile construction costs can be, according to the National Association of Homebuilders, building a home cost $267,900 in 2011, while in 2019, that price jumped to $485,128.2 These amounts don’t even take into account additional price hikes from supply chain disruptions following the arrival of COVID in early 2020.
What you paid for your home is not the same thing as how much dwelling coverage you need. To be absolutely clear, you need enough coverage from your HO-3 policy to build back your house in the event of a disaster like a fire. That means figuring in inflation, local building costs, and the extra expense of rebuilding to code (if you purchased an older home).
The good news is that it’s pretty easy to avoid the pitfall Lucinda and Niles fell into. Here’s how.
- Research with an agent: Before you sign on the dotted line, do a little research about your home (materials, roof, special fixtures, and HVAC system), and the area you live in. A chat with an agent can really help here. Have your home’s square footage handy (just your home, not your entire property). Your agent should be able to give you some insight into how much contractors are charging by the square foot, and how stable those charges have been.
- Purchase inflation coverage: Adding some inflation coverage to your policy to cover those sneak jumps in material costs won’t cost much. In fact, with some providers, it’s built-in. Nationwide’s basic homeowners plans include an inflation guard, for instance. Unraveling the exact parameters of your inflation coverage, on the other hand, may require another talk with an agent. Don’t be afraid to pipe up and ask. It’s your home — and your wallet — after all.
- Look into replacement cost coverage: When demand goes up, it costs more to build, as Lucinda and Niles (above) found out the hard way. Replacement cost coverage gives you a cushion to offset unexpected or rising building costs. It can take a few forms: guaranteed (total) replacement cost and extended replacement cost (usually from 20 to 50 percent above your dwelling coverage limit).
- Consider building ordinance coverage: If you’re living in an older home, which may have been a little cheaper to purchase, rebuilding may mean building to code, which can be a significant expense. Building ordinance coverage is usually set at 10 percent of your dwelling coverage. Some insurers, like State Farm, offer building ordinance coverage in their standard package. I’ve reported on this, and State Farm’s other premium protections in full, in my hands-on State Farm review.
FYI: A well-built house is in the details. Those same details can affect your bottom line when rebuilding. Special factors to consider are: exterior wall construction, roof type, additional structures like garages, fences, and swimming pools, as well as special, hard-to-replace features like custom fireplaces, exterior trim, and windows.
How Much Coverage Do I Need for My Possessions?
I’ve got another story for you, and one that may hit closer to home.
Tonia and her partner Leslie bought a condo in downtown Minneapolis. Tonia was from Queens, New York, and was never comfortable with the first-floor windows, which didn’t have security bars.
When a burglar broke in and emptied the condo of all its valuables, including a $3,000 limited edition David Hockney print Leslie had bought last year, Leslie was heartbroken. (She’d argued against the slightly more expensive replacement cost value possessions coverage Tonia had wanted for their Lemonade home insurance plan.)
Fortunately, Tonia had won that argument, and when it was time to file their insurance claim, Lemonade paid out the money they needed to buy all their things back at their current market value, including the $3,000 Hockney.
Let’s unpack that a bit.
Did You Know: Brick-and-mortar insurance offices and on-site inspections add a human element to your homeowners policy, but with newcomers like Lemonade Insurance you can arrange AI-enhanced remote inspections for quicker payouts. Sound like something you’d be interested in? See how it works in my complete Lemonade home insurance review.
Actual Cash Value Coverage vs. Replacement Cost Value Coverage
Insurance providers typically set coverage for possessions at around 60 percent of your dwelling coverage. But be careful. When you set up your policy, you have a big choice to make when it comes to insuring your stuff, a choice Tonia got right.
You can opt for the slightly cheaper ACV coverage for your possessions. This would cover your stuff at its depreciated value. (A set of wireless speakers you bought for $700 in 2020 would be worth about $350 in 2022, for example.) And that’s what you’d get to buy them back.
Or you can go with the more expensive and smarter choice (in my book), RCV coverage. Take those speakers in the last example. With RCV coverage, your insurer would pay out $700, or whatever they cost in 2022 to replace. They could cost more.
Of course, to get your payout, you need to hold up your end of the bargain. You can’t just claim you lost an expensive print. You need to document the loss. Otherwise, you can bet a lot of expensive things that never existed would go missing after burglaries. (“Yes, officer, I’m sure Elvis’ golden golf clubs were sitting right there behind the dining table.”)
Take an inventory of your possessions, along with photos and receipts (where possible). For expensive items that exceed the limits of your coverage, you may need to take out extra insurance. That Hockney print from above is a good example. Pretty much every home insurance plan I’ve looked at would consider a $3,000 piece of art “a valuable” that required additional coverage.
Homeowner's Tip: If you do own a lot of expensive things, you’re going to want to review valuables options closely. One insurance company we like that throws limited valuables coverage in with their basic plan is State Farm. I’ve provided a full breakdown of the exact costs in my 2022 State Farm prices and protections guide.
How Much Additional Living Expenses Coverage Is the Right Amount?
If additional living expenses had a story, it would go like this.
Barry and Kate had a lovely four-bedroom home in Galveston, Texas. It was flattened by a tornado and they had to move out. Because they were regular Safehome.org readers and chose a reputable home insurance provider, they got reimbursed for all their extra living expenses while their new home was being built: rent expenses, extra gas for Kate to get to work, and moving and storage costs. Months later, they moved into a new home and lived happily ever after.
ALE coverage is standard. You can’t refuse it — and you wouldn’t want to. Caps vary but are usually in the neighborhood of 20 to 30 percent of your dwelling coverage limit, though you can usually raise this.
Some providers don’t have a cap, but agree to foot the whole bill. If this is the case, you’ll see “actual losses sustained” in your policy under the loss of use section. However, most HO-3 policies pay out “for the shortest time possible,” meaning the amount of time they believe it will take you to move back in. In this case, you really do have an incentive to hire a contractor who can keep to a schedule.
Vacating your home is obviously no picnic. Just don’t turn it into a fiesta. Home insurers are footing these extra living costs to help you over the hump, not to support your spa habit.
Did You Know: Homeowners who rent out a part of their homes can also expect to see a reimbursement for loss of rent for the period their homes are uninhabitable.
How Much Personal Liability Coverage Should I Take Out?
A final story. This one is about a dog-grooming appointment that ended in tragedy.
Jolie lived by herself in a third-generation mansion in the hills above Santa Barbara, California, with her shih tzu, Mork. Mork went to the dog spa in Goleta every Wednesday afternoon.
One afternoon, for no known reason, Mork attacked his groomer and then ran amok in the dog spa. At the end of his rampage, Mork had torn up the waiting lounge, bit the ankle of a patron, and scratched a girl very close to the eye. Total damage (including medical expenses): $4,700. Legal expenses: TBA.
Jolie had, unfortunately, let her homeowners policy lapse. The final bill — legal expenses included — came out to $15,000. Jolie was liable for every penny.
Never let your home insurance lapse, because if you do, you won’t have liability coverage to protect your wallet against the freak damage you (or your loved ones) cause to others or their property.
The amount of liability coverage you take out should be in the $300,000 to $500,000 range. This will also defray legal fees and medical expenses to others. (You can choose the cap on medical expenses, but between $1,000-$2,000 is standard.)
FYI: Personal liability casts a pretty wide net in terms of coverage, but a key element in the definition is “accidental damage.” In other words, if you get mad at your neighbor and key his brand new Tesla, don’t expect a claims payout to cover the repairs. You’re on your own there.
Every home insurance story can have a happy ending if you go in with your eyes open. (A little help from experts never hurts either.) Our original question was: How much homeowners coverage do I need? Here’s what we discovered.
Dwelling coverage isn’t the value of your home; it’s how much money it will cost to rebuild it. Because that amount is bound to go up in the future, you should consider padding your dwelling coverage with replacement cost coverage (to meet higher building costs) and building ordinance coverage (in case you need to rebuild to code). Inflation protection, which adjusts automatically, never hurts either.
Personal possessions coverage comes in two forms: actual cost value and replacement cost value. For full protection, I recommend RCV coverage, so you can buy your stuff back new, not off eBay. Either way you go, always document your possessions with photos and receipts.
Additional living expenses coverage is there to help you get back on your feet, not to live it up. And, finally, never let your home insurance policy lapse, even if it’s only to keep your personal liability insurance. This would cover an angry dog as much as it would the mailman who slips on the ice out front.
Did You Know: You can only stretch personal liability insurance so far. If you have a swimming pool and a house full of kids (who throw pool parties) or employ a housekeeper or gardener, you might consider an umbrella insurance. This policy covers you in the event of a catastrophic accident that would easily sap your HO-3 coverage.
It really depends on the age and value of your home. But generally speaking, adding an extra cushion to your dwelling coverage limit is a good idea because building costs almost always go up.
20 to 50 percent of your dwelling coverage is standard.
HO-3 home insurance policies never cover floods that originate outside of your home. A burst pipe is another story. Most home insurance plans will cover sudden plumbing accidents.
Actual cash value coverage will pay you the depreciated value of your possessions, while replacement cost value coverage will pay you the current market value.
Building ordinance coverage gives you extra money (usually 10 percent of your dwelling coverage) to rebuild your home to code.
Most experts recommend between $300,000 and $500,000. The default is $100,000. Here are three cases where you’d consider the higher end of that spectrum: 1) You’ve got a pet that’s been known to take the occasional bite out of an ankle or thigh; 2) You’ve got very high-strung kids prone to damaging property and/or injuring other people; 3) You employ household helpers like a gardener, nanny, or housekeeper.