How Much Homeowners Insurance Do I Need?
By George Kamel
Key Takeaways
- You need enough home insurance to completely rebuild your house and replace all your belongings.
- Insure your dwelling for 100% of the rebuild cost—not market value, and not what you paid for the house.
- You should get a replacement cost homeowners policy, with personal property coverage at 50–70% of your dwelling limit.
- Carry $300,000–500,000 in liability coverage. The $100,000 minimum most mortgages require is a floor, not a plan.
- Don’t stop with a standard homeowners policy. Make sure you have all the extra coverage you may need like flood or earthquake insurance if you live in disaster-prone areas.
We’ve all flicked on the news to see mile-high flames twisting up from homes on a charred mountainside. It’s easy to move on to the next thing while you’re watching in safety from your midcentury modern sofa. But the truth is, that could be your home—maybe not in a forest fire, but some disaster. And homeowners insurance is the one way you can protect yourself.
Quick Answer
You need enough homeowners insurance to cover the full replacement cost of your home’s structure and all your personal belongings. That means dwelling coverage equal to 100% of local rebuild costs, personal property coverage at 50–70% of your dwelling limit, and at least $300,000–500,000 in liability protection. That’s the real number—keep reading to see how to get there.Industry research shows seven out of ten homeowners are underinsured by an average of roughly 20%.1 If you don’t have enough home coverage, your finances will be turned inside out, along with your life. Let’s break down the numbers you need, coverage by coverage.
How Much Home Insurance Should I Have?
The short answer: Your home insurance policy should be enough to rebuild your life without dipping into your 401(k). It’s crucial to have the right amount of coverage for your home. So you’re on the right track if you’re asking, How much should I insure my home for?
Homeowners insurance covers a lot of things, but there are also some things it doesn’t cover, like flooding and certain natural disasters. It can get confusing, but don’t worry—I’m here to help you figure out how much you need of what so you can protect your biggest investment.
|
You want enough home insurance to: |
The coverage that does it: |
Amount |
|
Rebuild your home structure |
Extended dwelling coverage |
100% of local rebuild cost |
|
Replace your stuff |
Personal property |
50–70% of your dwelling coverage |
|
Cover injuries and damages that happen on your property |
Liability |
$300,000–500,000 |
|
Reimburse your higher-than-normal living expenses after the loss of an insured home |
Additional living expenses (ALE) |
20–30% of your dwelling coverage |
I’ll go into each of these in more detail below, but these are the main ways that homeowners insurance protects you financially.
And heads up, if you have a mortgage, you’re actually required to have a certain minimum amount of dwelling and liability insurance. (If you’re researching homeowners insurance because you’re just starting to shop for a home, check out our free Home Buyers Guide. It tells you everything you need to know about what can sometimes be a pretty complicated process.)
If you already have homeowners insurance, but aren’t sure how much you have, take a look at your insurance declaration page. This is a really helpful summary from your insurance carrier of exactly what you’re paying for.
Now, let’s figure out how much home insurance you need.
Figure Out What Perils Your Home Is Vulnerable To
Make sure the policy you buy doesn’t exclude perils that are likely where you live (think hurricanes, mold, coastal flooding and storm surge, wildfires, etc.). If you can’t find one that doesn’t exclude a high risk for your area, you may have to buy extra insurance called a rider. If you already have homeowners insurance, check your policy’s list of exclusions to see what you’ll be on the hook for and consider getting a rider or a new policy if you need it.
Research Local Building Costs
Next on your list: Research local construction costs. How do you do that? In the words of moms everywhere, Google it! Depending on your area, you may be able to find rough numbers for how much it costs to build per square foot. But the grade of construction you choose will impact construction cost.
Another option: Rather than trying to guesstimate on your own using ballpark numbers, contact a construction company in your neck of the woods to see if they have the figures. Some even have free quotes offered on their websites.
Figuring out this number will help you estimate your total homeowners insurance cost.
Understand Replacement Cost
If you’re going to buy a policy that covers the cost to replace your home, you’ll need to know how much your home will cost to, you know, replace.
Calculating the replacement cost can be tricky—just like calculating how upset your wife will be if you tell her what you really think about the new paint color on the living room walls (I know my suggestion of Snowbound was technically the right answer, which isn’t the same thing as the safe one). But it’s up to you to get it right—here’s how.
How Do You Calculate the Replacement Cost?
- Take the square footage of your home and multiply it by local construction costs. So, if the average cost to build a home in your area is $195 per square foot—roughly the national average once you factor in a contractor’s markup—and you own an average 2,000-square-foot home, it’ll cost around $390,000 to rebuild your home.2
- Next, get a second estimate. There are free online calculators that use your home’s square footage, building materials, and number of rooms to give you a good replacement cost estimate. Insurance companies often have these on their websites.
- Third, once you have your own estimates, ask a professional to give you theirs. An expert independent insurance agent, like one of our RamseyTrusted® pros, will know your area and can help you calculate a very close estimate of the replacement cost.
Insurance Can Be Confusing. We Have Someone Who Can Help.
RamseyTrusted insurance pros are independent and vetted—and they help you fill the gaps in your policies. They make getting insurance (like home, auto and umbrella) one less thing to stress about. Plug in your zip code to connect with an agent who understands the coverage needs in your area.
What Factors Affect the Replacement Cost?
When you finally have an accurate replacement cost, you should check it every couple of years. Plenty of factors—both in your control and not in your control—can affect the cost to rebuild your home.
New Building Codes That Take Effect After Your Home Was Built
If a natural disaster wipes out your current home, your new home will have to meet up-to-date building codes, which could require you to pay for new features or materials. Insurance companies sometimes offer building code coverage, which means they’ll pay for whatever the new codes require—so ask your insurance agent if that’s something you could add to your policy.
Remodeled Kitchens
Home is where the kitchen is (at least in my house), so it’s no wonder kitchen renovations change home values. Granite countertops, a farmhouse sink, scratch-resistant flooring, and that bougie waterfall island you’re so proud of—whatever fancy upgrade you’ve added, adjust your homeowners insurance to match the increase in your home’s value.
Additional Rooms and Structures
Maybe you finished your basement to add bedroom space for your growing family. Or maybe you added a garage, a workshop or a screened-in porch. New rooms add value, and unless you update your homeowners insurance to account for these additions, you risk having to pay for them again. No one wants that.
Rising Prices of Building Materials and Construction Costs
Bricks, timber and stone cost more over time, especially if a natural disaster has wrecked your part of town, stirred up demand, and lowered supply. Along with building materials, workers’ wages may increase, and construction costs will often go up with them.
Old and Hard-to-Replace Features
“They don’t build ’em like they used to!” Yep, that’s for sure. Building styles change over time, and so do the number of carpenters who know how to make arched windows and elegant ceiling molds. If your house has unique features, especially ones that require specialized craftsmanship, you may need to pay for extra coverage to have them replaced.
Conduct a Home Inventory of Your Personal Items
Many of us way underestimate how much we own. Maybe it’s because we buy things slowly over time—a leather armchair here, a floor-to-mattress dog ramp there—so we lose sight of their value. The risk, then, is to underinsure personal property and end up with a shock when the reimbursement check doesn’t replace the losses.
To keep this from happening, make an inventory of everything you own that has value. That’s right. Everything. Make a game out of it! Start in your bedroom and work your way to the garage. Take photos (or better yet, a video!) of each possession, especially more expensive items. This may sound like a lot of time, but what takes a few hours to inventory could take months of income to replace. So, be detailed! At the very least, take a photo of every room from each corner. It will help jog your memory about what’s in there.
As you go through all your stuff, it will also help you figure out if you have any really expensive items you need extra insurance for, which brings us to . . .
Create a List of Your Expensive Items
As you make your inventory, separate your most expensive items. Do you own a Monet? Or some really nice audio equipment that could blow the whiskers off your cat? Write down the estimated replacement costs of those items and ask your insurance agent if you need an additional policy (called scheduled personal property) specifically for them.
Pro Tip From George
Skip the spreadsheet and film a slow walkthrough of every room on your phone—open the drawers, the closets, and the garage shelving. It takes 15 minutes and gives your insurance company (and future you) an actual record of what you own, instead of a guess you’ll regret during a claim.
How Much Dwelling Coverage Do I Need?
You need dwelling coverage equal to 100% of your home’s replacement cost—not its market value, not your mortgage balance, and not whatever Zillow guesses your house is worth.
When most people think of home insurance, they think of a policy to pay for the actual building if it gets blown over. That’s what dwelling coverage is.
Dwelling Coverage
Dwelling coverage promises to rebuild your home if it burns down, crumbles in a windstorm, or gets crushed by a falling satellite. (The insurance business calls these perils or hazards.) You know, all the usual nightmare stuff we hope never happens. When you hear dwelling coverage, think the structure of your house, all the materials used to build it, and anything attached to it, like a garage, deck or front porch.
So, how much do you need? Your dwelling coverage should equal the replacement cost of your house, which is the amount of money it would take to build a replica of your home.
At the bare minimum, you should definitely have replacement cost coverage (RCV) for your home, which is what pretty much all standard policies offer anyway. It can fall short in some situations since there’s a strict coverage limit. And if construction costs have risen a lot in your area, that limit might not fully cover your cost to rebuild.
Some insurance carriers offer something called guaranteed replacement cost coverage. This is exactly what it sounds like: They’ll pay for the replacement of your house no matter how much construction costs have risen. Yes, please.
Guaranteed replacement cost coverage is the absolute best coverage you can get—because it guarantees coverage for every possible outcome! But this kind of top-shelf coverage can be hard to find, and many companies don’t even offer it.
On the other hand, most companies do offer a handy option called extended replacement cost. It extends your coverage by a certain percentage that could be anywhere from 10% to 50% to help cover increased replacement costs. Even a 10% extension on your payout is nothing to sneeze at, but you should always get the largest percentage possible.
Other Structure Coverage
Your typical home insurance policy will usually offer 10% of your dwelling coverage toward replacement of other structures. What are other structures? Good question. Your dream woodworking shop with an HVAC is included. So is your garden shed with that hedge trimmer from the ’70s and a family of brown recluses in the back corner. Other structures include barns, fences and detached garages. I’ll have to get back to you on outhouses, for the real woodsy folk out there.
You should evaluate your structures to see if 10% of your dwelling payout will be enough to cover them. If your building is complex or you have a few of them, chances are 10% won’t be enough.
A big trend in homeownership and real estate is owning an accessory dwelling unit (as the cool kids call them, ADUs) or in-law apartment. But one of these, which are often essentially small second houses in the backyard, is expensive, and you might have to buy extra coverage to get it protected.
Whether the ADU, (aka granny flat, guest house, carriage house) is attached to your house or not makes a big difference. If it’s something like a finished attic space or bonus room, your homeowners policy can cover it as long as your limit includes the value of the ADU. If it’s detached, however, you may need to purchase extra coverage. So, much like therapy, attachment style is the root issue here.
Insurance around ADUs differs by state. Make sure to talk to an independent insurance agent about any ADUs you own as well as other structures. They can help you get the right coverage.
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How Much Liability Coverage Do I Need?
You should carry at least $300,000–500,000 in liability coverage to protect your assets from a slip-and-fall lawsuit—the $100,000 minimum most mortgage companies require just isn’t enough. The threats to your bank account don’t just come from storms and fires. People getting hurt on your property and potential lawsuits are big, gaping vulnerable spots you need to get covered ASAP.
For what you get on every dollar you spend, liability insurance is one of the best buys out there. And when it comes to fighting ambulance chasers, policy size matters—so get as much as you can.
Personal Liability Coverage
Liability is the part of your homeowners insurance that covers your tail if someone gets hurt on your property. Anything can happen: a sprained ankle from a slip on the stairs, a broken arm from falling out of a tree fort, or a dog bite from Snowball (the pet you always said would never hurt a fly). Then, before you know it, you find yourself stuck in a legal bind that drains your bank account.
But wait! There’s hope. Homeowners insurance will cover accidents that happen on your property, so you won’t have to pay expensive medical bills or lawsuits from people who read too many cheesy billboards that say “Took a bad fall? You know who to call!”
Speaking of pain, did you know not all dogs are covered under homeowners insurance?
That’s right. In fact, if you have a dog whose breed has been flagged by insurance companies as “high risk,” any incidents involving your dog won’t be covered under your homeowners insurance. But this list is fairly short—most people’s dogs aren’t on it. For example, my adorable little French bulldog, Olive, couldn’t hurt you if she wanted to—but even if she did, she’s not considered a high-risk breed.
Just so you know, some carriers consider these dog breeds high risk.
- Pit bulls
- Doberman pinschers
- Rottweilers
- Chows
- Great Danes
- German shepherds
- Siberian huskies
- Alaskan malamutes
- Wolf-dog hybrids
- Any mix of these breeds
If you just have to have a wolf-dog hybrid, best of luck, because you’re on your own.
Consider an Umbrella Insurance Policy
You should also look into adding an umbrella policy if you have a high net worth (above $500,000). This supplemental policy is just one more layer of liability to protect you and your assets. It kicks in once you’ve reached the limits on your standard policy.
Because an umbrella policy isn’t a standalone policy, you must already carry homeowners, auto, or other kinds of insurance to get one.
What Is Medical Payments Coverage?
Medical payments coverage is no-fault coverage for small guest injuries—think a broken toe on the porch step, not a lawsuit. Most policies offer $1,000–5,000 in coverage, which is usually plenty for the trip-and-stumble stuff neighbors actually run into.
Whether you pick a lower limit or a higher one should depend on your risk for this kind of incident. Do you have a dog? Do you have a lot of people over? Do you have a tricky staircase? If you do, go with more.
What Mistakes Leave You Underinsured?
Here are five face-palm moments with home insurance to avoid:
- Insuring for market value instead of rebuild cost. Market value includes your land—and land doesn’t burn down. Insure the sticks and bricks, not the dirt underneath them.
- Forgetting to update your policy after the bougie kitchen remodel. New quartz countertops and a six-burner range don’t insure themselves. Call your agent the same week the contractor leaves—or you’ll be underinsured on the upgrade you just bragged about on Instagram.
- Ignoring local building code changes. If your city has updated its codes since your house was built, rebuilding to match them costs more—and your standard policy may not cover the difference unless you add building code coverage.
- Skipping flood insurance because you’re “not in a flood zone.” Standard homeowners insurance usually doesn’t cover flood damage. If you live near water—or even near a hill—you may need a separate policy. You can check your property on a FEMA flood map.
- Never doing a home inventory. You can’t prove what you lost if you don’t know what you had. (Remember the video walkthrough from the Pro Tip above? This is why it matters.)
How Much Personal Property Coverage Do I Need?
Your personal property coverage should equal around 50–70% of your dwelling limit (or even 100% if you have an exceptional amount of stuff)—enough to replace your furniture, clothes, electronics, and everything else you own—even that viral gadget you bought and used exactly twice.
Personal Property Coverage
Personal property applies to your furniture, appliances, clothes, sports equipment, electronics, and even the food in your refrigerator. (This coverage is, after all, personal, and it would be a shame to lose those two dozen free-range eggs you bought from Costco.) It covers your stuff if it’s destroyed, stolen (egg thieves!) or vandalized.
You should have enough personal property coverage to replace all your belongings (but maybe don’t count the viral TikTok stepper machine you fell for).
As you’re figuring out how much personal property coverage you need, ask yourself, If I lost everything, how much would I need to get back on my feet? A RamseyTrusted pro can help you figure out what different companies offer and help you get more if you need it.
Actual Cash Value vs. Replacement Costs Coverage
When it comes to personal property coverage, there are two kinds to consider: actual cash value (ACV) and replacement cost.
ACV gives you what your stuff is worth on the day it went up in smoke (or whatever tragedy struck). In other words, depreciation is factored in. So, whatever you originally paid for that hand-knotted New Zealand wool rug is not the amount you’ll get from the insurance company. You’ll get something closer to the Facebook Marketplace resale price.
Replacement value, on the other hand, forks over whatever you need to get a new one—including inflation. If you can, definitely go with replacement cost coverage. It will mean your premium is higher, but it’ll be worth it!
Coverage for Valuable Items
Like we mentioned earlier, your insurance policy usually pays for your stuff up to a percentage of your dwelling limit. This means if you have some really expensive stuff (think furs, jewelry, a fine art collection, a Dwayne “The Rock” Johnson–level home gym, etc.) you’ll need to buy extra coverage for that. You can get what’s called a scheduled personal property rider to cover extra-expensive stuff—you’ll schedule specific items like your great-grandmother’s five-carat diamond ring to be covered for more.
How Much Additional Living Expenses (ALE) Coverage Do I Need?
ALE coverage (also called loss of use coverage) should run 20–30% of your dwelling limit—enough to cover the extra cost of hotels, restaurant meals and pet boarding while your house gets rebuilt.
Imagine that a natural disaster destroys your house. How long would it take to rebuild it? A few months? A few years? How much extra money will you spend sleeping in hotels and going out to eat while you wait for your home to be rebuilt?
Hopefully, nothing—if you have ALE coverage. ALE is like a super emergency fund: If you and your family were left with nothing after an accident—nowhere to live, no kitchen to use—ALE would reimburse you for the added cost of living without a home.
The key word here is added cost of living. For instance, let’s say you cook all your meals, and you pay around $500 a month for groceries. One day, a fire destroys your kitchen, and you’re suddenly forced to eat out. Your monthly food bill jumps from $500 to $900. ALE would reimburse you for the extra $400 hit to your food budget.
Most homeowners insurance policies include ALE and use a percentage of your extended dwelling coverage to calculate what you’ll get—usually from 20–30%. For example, if your extended dwelling coverage is $200,000, your insurer might give you $40,000 (20%) for ALE. If you have a large family and you believe your ALE would be high, ask your insurance agent how you can get more ALE.
What Additional Home Insurance Coverages Should I Consider?
Here’s a list of seven extra coverages you should consider, depending on things like the region you live in, whether you own fancy stuff, and if your landscaping could be featured in Better Homes and Gardens:
- Earthquake, sinkhole, hurricane or flood coverage
- Wind/hail coverage
- Building code coverage
- Extended replacement cost coverage
- Water backup coverage
- Scheduled personal property
- Extended yard and garden coverage
It may sound like we’ve covered every possibility at this point, but there could still be some gaps in your coverage.
What if you live in California with a view of the mountains and the San Andreas Fault? What if you own a bungalow bordering Louisiana’s levies? Insurance companies don’t cover certain natural disasters like earthquakes, floods, hurricanes (if you’re on the coast), and sinkholes. You can and should buy separate insurance for those events if they’re common in your area.
Insurance companies in some areas sell hail and wind protection separately or require a separate deductible for damage from those perils.
Insurance coverage also gets picky about certain types of damage caused when Murphy comes for a visit. Water damage from a clogged main sewer line or off-property sump pump isn’t covered, but you can buy water backup coverage separately if this is a concern.
Do You Actually Have Enough Coverage?
Take the Coverage Checkup to get a personalized insurance action plan that guides your next steps so you can confidently check things off as you get covered.
How Do You Save Some Money?
Your deductible, the cash out-of-pocket you pay before insurance kicks in, is the biggest area you can save on your homeowners insurance. The higher your deductible, the lower your rate. Just make sure whatever deductible you choose is money you actually have sitting in your emergency fund (Baby Step 3)—not money you’re hoping to find under your charred couch cushions when disaster strikes.
It’s no secret I love saving money. But when it comes to home insurance or coffee makers, I don’t cheap out. Some things, like high-quality home insurance or Nespresso machines that help me channel my inner George (Clooney), are worth the extra dough.
But that doesn’t mean you can’t also look for ways to keep a little more of your money. Here are a few more ways you could save:
- Bundle your auto or other insurance with your home insurance.
- Look for discounts for things like loyalty, improvements, added safety features and security systems (unfortunately, your dog doesn’t count).
- Pay your premium in full.
- Replace damaged parts/items with more energy-efficient ones to get a green improvement reimbursement.
Do You Have the Right Amount of Homeowners Insurance?
Hopefully the question, How much home insurance do I need? has been answered. Your next move is to figure out if you have enough or make sure you buy the right amount. Choosing the right independent insurance agent is a big part of that. You want someone who knows their stuff and can guide you through the process of insuring your biggest investment.
Our network of RamseyTrusted pros will walk you through exactly how much home insurance you need and help you choose the right coverage—from dwelling to personal property, all the way to liability and additional living expenses. They can even check if you can save any money by bundling home and auto insurance together.
One of our pros helped Patricia M. get the exact personal property coverage she needed.
“We worked with a RamseyTrusted pro and are very happy,” she said on THE Ramsey Baby Steps Community Facebook group. “When it came time to renew our homeowners and auto insurance, he saved us hundreds of dollars. He even found us affordable insurance for our collections.”
One final thing before I let you figure out what’s for dinner: The value of your insurance policy won’t necessarily automatically increase along with the value of your home, so check your policy or talk with your agent to see if yours has inflation protection. If it doesn’t, it’s important to talk with your agent every year to make sure you have enough coverage. If you work with a RamseyTrusted pro, they’ll help you with that and taking lots of other guesswork out of your homeowners insurance.
Next Steps
- Pull your declarations page and check your dwelling limit against your rebuild cost.
- Talk with one of our RamseyTrusted pros. They’re independent insurance agents—that means they work for you, not the insurance company.
- Buy coverage that you’re confident meets your needs and budget (whether that’s a rider or a new policy).
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Should I insure my home for its tax assessment or market value?
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Neither! You should insure it for the replacement cost, which is what it costs to buy the appropriate building materials and hire a crew today. Tax assessments and market values include the land, which doesn’t burn down. Google or look up a local construction company’s website to figure out your local building costs and determine how much it would take to rebuild.
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How often should I update my homeowners insurance limits?
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Check your policy every year, or whenever you make a major change, to see if you still have enough coverage if anything were to happen. If you added a deck, finished the basement, or finally got that granite countertop George keeps talking about, call your agent. They can help you figure out if you need to add coverage.
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Does my homeowners insurance cover my home-based business?
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Usually, no. Standard homeowners insurance policies have very low limits for “business property,” including computers used for business. If you’re running a side hustle from your garage, you likely need a separate rider or business policy. There are independent agents like our RamseyTrusted pros who can help you understand whether you need business insurance and to get it if you do.
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What is the difference between extended and guaranteed replacement cost?
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Extended replacement cost adds a buffer (like 10–50%) over your limit if building costs spike. Guaranteed replacement cost pays whatever it takes to rebuild, no matter the price tag. Go for guaranteed if you can find it, but these policies are becoming rare and expensive. Extended replacement cost is a good second-best option!
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About the author
George Kamel
Get proven Ramsey answers fast.