How Much Homeowners Insurance Do I Need?

While not federally mandated to do so, your mortgage lender may require you to take out a homeowners insurance policy, and we strongly recommend purchasing one to protect against a home loss. You should aim for enough home insurance to cover all your assets should your house be destroyed in a disaster or you be held liable in an injury lawsuit.

Generally, homeowners insurance policies cover four main areas:

Dwelling coverage: to rebuild your home
Personal property coverage: to replace personal property destroyed within the home
Liability coverage: should someone get injured on your property and sue you
Additional living expenses (ALE) coverage: to cover expenses if you’re forced to temporarily move out of your house.
If your current policy’s limits aren’t enough to cover these expenses, consider purchasing additional homeowners insurance.

How Much Dwelling Coverage Do I Need?
How Much Personal Property Coverage Do I Need?
How Much Liability Coverage Do I Need?
How Much Additional Living Expenses Coverage Do I Need?
How Much Homeowners Insurance Should I Have Based on My State?
How Much Dwelling Coverage Do I Need?
You should have sufficient dwelling insurance to cover the cost of rebuilding your home and any attached structures, such as a garage, if they’re destroyed due to a covered peril. Remember to account for replacing built-in appliances, such as a water heater, when determining your dwelling coverage needs.

If you own a condo, certain elements of your dwelling’s structure, such as the walls, may or may not fall under the condominium master policy. Consult your master policy to determine what structures you’re responsible for insuring.

Your policy will include one of three levels of coverage. Unfortunately, some homeowners don’t realize that their policy’s limits aren’t high enough to entirely replace their homes.

Coverage Limit

Actual Cash Value (ACV) The ACV is the market value of your house, minus depreciation. While the value of your land may have increased since you bought it, specific elements of your house, such as the roof, plumbing or floorboards, have aged, and therefore may have depreciated in value. That’s why the ACV likely won’t cover the entire cost to rebuild your home with new materials.

Replacement Cost Value (RCV) The RCV is the cost to rebuild your house at current prices for labor and materials. A policy that covers your home’s RCV will have higher premiums than one that covers only the ACV. RCV coverage could provide a substantial amount of additional reimbursement if you need to replace all or a part of your home. However, it is still subject to policy limits.

Guaranteed Replacement Cost (GRC) / Extended Replacement Cost (ERC) The GRC/ERC is like the RCV, plus a guarantee that the insurance company will pay a certain percentage beyond your policy’s limits to rebuild your home. This is relevant if a regional disaster temporarily drives up the cost of labor and building materials. However, this is the most expensive option.

For example, say your pipes burst, flooding the ground floor of your home. The wooden flooring that you installed 10 years ago for $10,000 needs to be totally replaced. The insurance adjuster estimates that with 10 years of wear and tear, the current ACV of your flooring is only $6,000, and new flooring will cost $11,000. Also, your home insurance policy has a $1,000 deductible. An ACV policy would only reimburse you $5,000, and you’d have to pay the rest out of pocket. However, an RCV policy would reimburse you $10,000, and you’d pay only the deductible.

How Much Personal Property Coverage Do I Need?
The personal property clause of your homeowners insurance policy needs a high enough limit to replace all of your possessions if they’re stolen or destroyed in a disaster. Virtually all of your possessions are covered by this clause, with one notable exception—your car. Even if it’s parked in your garage, your vehicle needs to be insured by a comprehensive policy to be protected against theft, fire, or other disasters.

Generally, home insurance companies default to setting the personal property insurance at 75% of your dwelling coverage. So if your house’s RCV is $500,000, then your personal property limit will be $375,000. Whether this is enough depends on the total value of your possessions.

While it may seem like a lot of work, taking an inventory of everything you own will help you accurately estimate your coverage needs. It will also make filing a claim much easier in the future should your property be destroyed.

Start with large items: TVs, computers, fridges, couches, beds. Estimate how much you spent on each item and how much it would cost to replace them. Then tally the smaller things: clothes, kitchen appliances, tools, sports equipment, etc. Once you have an estimate of the value of everything you own, compare it to your home insurance policy’s default amount. If the coverage is less or more than you need, talk to your insurer to change your limits.

Finally, check your homeowners insurance policy for item-specific limits. For example, most standard policies will cover fur and jewelry only up to $2,000. If the total value of any relevant items you own exceed this limit, you will need to purchase a separate endorsement or policy to increase your coverage amount.

How Much Liability Coverage Do I Need?
The more assets you have and the more at risk of being sued you are, the more liability coverage you need. The liability section of your homeowners insurance policy protects you if someone is injured on your property and sues you. For example, if your dog bites a neighbor, or someone slips by your pool, you could be liable for their medical costs. If your liability coverage limit is $100,000, but someone sues you for $250,000, you would be responsible for the $150,000 difference, and your personal assets could be claimed in the settlement.

What Assets Are at Risk in a Lawsuit?
Most of your possessions—such as money in a bank account or your vehicle—are at risk if someone tries to sue you and you don’t have adequate insurance. However, some assets, such as retirement funds, are exempt from lawsuits. Under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both Roth and traditional IRAs are protected up to $1 million combined, and this amount is adjusted for inflation every three years.

SEP IRAs, SIMPLE IRAs and most rollover IRAs are fully protected from creditors in a bankruptcy, up to any amount. Additionally, money in a company-sponsored 401(k) is exempt, and in some states, such as Florida, home equity is protected.

However, each state has different legislation regarding how insulated your retirement funds are from a lawsuit, so you should review your state’s laws to determine what is at risk. For example, in California, IRAs do not have the same level of protection as money in a 401(k). So California residents may need to include at least some of their IRA investments in their estimate of their total at-risk assets.

Assets at Risk in a Lawsuit
Assets That May Be Protected from a Lawsuit
Vehicles titled in your name 401(k)s
Boats IRAs
Business assets that you personally own Annuities
Non-dwelling real estate Home equity
Future wages Social Security benefits
Money in your bank accounts
Investments
Personal items
Fortunately, liability insurance is typically one of the least expensive components of a homeowners insurance policy. The difference in premiums between $100,000 and $500,000 worth of liability coverage is often very small, so you should strongly consider choosing a higher limits. Below you can see how much different liability limits cost at State Farm.

Liability Amount
State Farm Total Monthly Rate
$100,000 $57.17
$300,000 $59.33
$500,000 $61.50
$1,000,000 $64.08
If your total assets exceed the limit of your homeowners policy’s liability clause, you can also consider purchasing an umbrella policy to provide additional coverage.

For example, consider if someone files a lawsuit against you for $750,000, and your home insurance policy has a $500,000 limit. Normally, you’d be responsible for the $250,000 that exceeds your liability coverage limit. But if you have an umbrella policy that provides $1 million in insurance, it will cover the difference.
How Much Additional Living Expenses Coverage Do I Need?
Most insurers set your additional living expenses (ALE) coverage at a fixed percentage of your total dwelling coverage amount. For standard homeowners insurance policies and renters insurance policies, it’s typically 30%. So, if your policy has a $500,000 dwelling coverage limit, your ALE coverage limit would be $150,000. For a condo, your ALE coverage amount may be up to 50% of your dwelling coverage limit.

ALE coverage can be critical if you’re temporarily displaced while your home is being repaired. For example, if your house is damaged in a fire, and it will take two months to repair, you’ll have to rent a new home until your house is in a livable condition. In this case, ALE coverage may pay the following expenses, in order to provide comparable living conditions:

Rent or hotel fees
Gas for traveling between your house and temporary home
Moving costs
Food costs, if your temporary home doesn’t have a kitchen
How Much Homeowners Insurance Should I Have Based on My State?
We compiled median home values in each state, as well as the property damage per square mile over the last 60 years. If your state tends to see higher property damage costs, such as California or Louisiana, consider choosing GRC/ERC coverage.

State
Median House Value
Property Damage Per Square Mile
Louisiana $144,100 $1,238,042
California $385,500 $778,786
Florida $159,000 $708,850
Mississippi $103,100 $624,741
New Jersey $315,900 $407,854
Alabama $125,500 $334,079
North Carolina $154,900 $169,429
Ohio $129,900 $166,321
Vermont $217,500 $156,670
Tennessee $142,100 $155,227
Massachusetts $333,100 $154,880
Illinois $173,800 $152,540

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