How Much Home Insurance Do I Need? A Guide for Buyers
If you're buying a home, choosing the right amount of home insurance for your property is key. Buy too much, and you're wasting cash on coverage you'll never use.
Buy too little, and if a hurricane, hailstorm, or other disaster strikes your home, your insurance might not cover the costs to fix the damage—which means you'll be paying out of your own pocket.
So how much home insurance is enough? In this latest installment of our Home Buyer's Guide to Home Insurance, we'll outline all you need to know to get the right amount and type of insurance to suit your circumstances perfectly.
How much home insurance do I need?
The goal of your homeowner insurance policy is to ensure you're covered not only for minor damage that you'd like financial help fixing, but more importantly, in case your home is completely destroyed (in a tornado, fire, or otherwise) and needs to be rebuilt from scratch. This is known as "actual total loss" or "total loss."
Total loss coverage varies from area to area as well as from home to home, but basically boils down to an estimate of how much it would cost to rebuild your home. That could cost more than you paid for your house, or less—it all depends on construction costs in your area.
"Size, materials, quality of finish, and a number of other factors will influence that rebuilding cost," says Stefan Tirschler, product and underwriting manager at Square One Insurance Services.
To determine the total loss coverage for your property, you'll want to talk to a home insurance company or agent (who probably represents various insurance companies), who can determine the best amount of coverage based on your home's square footage, the local construction market, and, of course, the current market value of the house.
"When you shop for home insurance, your insurance provider will likely have access to electronic reconstruction cost-estimating tools to help provide a sense of how much coverage you need," Tirschler explains.
If you have a mortgage on your home, your lender will probably require your coverage to equal 100% of the replacement cost of the home. And even if your home is paid off—or no requirement is in place—it's still a good idea to buy enough coverage to cover the complete replacement cost.
Even if the odds are slim that you'll ever need to use it, the peace of mind it can provide in the event of a disaster is priceless.
Does home insurance cover what's inside the house?
Another factor to consider is not only the replacement cost of your house, but what's inside as well—in other words, your belongings. After all, if your home is destroyed by fire or damaged by a hurricane, it's not just the roof and walls that take the hit.
Most home insurance policies will cover interior items, but that doesn't mean everything inside your home is safe. For instance, a "named perils policy" typically covers only a specific, narrow list of causes of loss, and depending on why you place the claim, you may find your insurance company won't pay up!
If you want to ensure your valuables are fully protected, Tirschler suggests looking for an insurance provider that offers an "open perils" (or “all-risk”) policy.
"Open perils policies provide the strongest protection, because they cover all possible causes of loss except for those that are specifically excluded," he notes.
Is basic home insurance enough?
As you shop for home insurance and compare quotes, you should know that most insurance providers won't give you just one quote—rather, they may offer several. This is because companies often offer different levels of insurance—like "basic" and "enhanced"—each with their own price, pros, and cons. Here are some factors to consider:
Deductible. A deductible is the amount you'll need to pay out of pocket before your insurance kicks in. Generally speaking, the higher the deductible, the cheaper the monthly insurance premiums. Why? Because with a high deductible, you'll have to pay more before your insurance company has to pitch in. Deductibles often range from $1,000 up to $5,000.
Coverage limits. A coverage limit is the maximum amount your insurer will pay when something goes wrong and you file a claim—everything above this amount, you'll have to pay out of pocket. For instance, a more affordable, basic plan might pay the medical bills if a guest is injured at your house at up to $1,000 per person, whereas a more expensive, enhanced plan might cover up to $5,000 per person.
You can choose between these various insurance levels based on your personal comfort level, tolerance for risk, and how much money you have in the bank in case of emergencies.
If your circumstances or outlook change, most companies will allow you to increase or decrease your coverage. For instance, if you could only afford a basic, bare-bones plan originally but want pricier/better coverage after getting a promotion at work, most insurance companies will happily adjust your plan to suit your new circumstances.
Do you need additional home insurance riders?
Your insurer will also likely offer you some additional, optional coverage. Got expensive jewelry or artwork in your home? You may want to purchase additional coverage. You'll pay more now, but if your valuables are damaged or destroyed, your insurance company will help you pay to replace them, which could save you money in the long run.
"If you have any high-value items, such as jewelry or expensive art, these will require a different policy to truly cover their actual worth," says Ralph DiBugnara, president of Home Qualified.
Remember, too, that you may need to purchase a separate insurance policy for things that are not covered in your plan. For instance, floods and earthquakes are typically not covered in basic insurance plans, so if you want it, you'll have to buy this insurance separately.
In our next installment of this series, we'll dive in more depth into what home insurance covers—and what it doesn't.