How much homeowners insurance do I need?

Use these guidelines to protect your home and your assets with adequate insurance coverage

If disaster strikes, you want enough homeowners insurance to rebuild the structure of your home and to help replace your belongings. You might even want to cover costs if you're unable to live in your home and to protect your financial assets in the event of liability to others. Use these guidelines to help determine the coverage and amounts you might need.

Determine level of insurance for your home's structure

The price you paid for your home—or the current market price—may be more or less than the cost to rebuild.

Standard homeowners policies provide coverage for disasters such as damage due to fire, lightning, hail and explosions. Do you live in an area where there is risk of flood or earthquake? You will need coverage for those disasters, as well. Regardless, you'll want the limits on your policy to be high enough to cover the cost of rebuilding your home.

The price you paid for your home—or the current market price—may be more or less than the cost to rebuild. Keep in mind- if the limit of your insurance policy is based on your mortgage, it may not adequately cover the cost of rebuilding. Your coverage amount should be revisited often vs. a "one and done" process.

To make sure your home has the right amount of structural coverage, consider:

Major factors impacting home rebuilding costs

What are current local construction costs? For a quick estimate of the amount of insurance you need, multiply the total square footage of your home by local, per-square-foot building costs.

To find out construction costs in your community, call your local real estate agent, builders association or insurance agent.

Details that can impact home rebuilding costs

Have you improved your house since it was first insured? Take into account improvements you've made that have added value to your house, such as a kitchen renovation or the addition of another bathroom.

Other considerations

Is your home up to code? Building codes are updated periodically and may have changed significantly since your home was built.

Is your home older and built with hard-to-replace features? If you own an older home, you may have to buy a modified replacement cost policy. This means that instead of repairing or replacing features typical of older homes—like plaster walls—with like materials, the policy will pay for repairs using today's standard building materials and construction techniques.

Determine how much insurance you need for your possessions
Most homeowners insurance policies provide coverage for your belongings at about 50 to 70 percent of the insurance on your dwelling. However, that standard amount may or may not be enough. To learn if you have enough coverage:

Conduct an inventory of your personal possessions

In order to accurately assess the value of what you own, it's highly advisable to conduct a home inventory. A detailed list of your belongings will not only help you figure out how much insurance you need, but it will also serve as a convenient record. In the event any or all of your stuff is stolen or damaged by a disaster an inventory will make filing a claim much easier.

While you're reviewing your possessions, think about whether you want to insure them for actual cash value (where the policy would pay less money for older items than you paid for them new) or for replacement cost (which would cover to replace the items).

Take stock of your expensive items

There are limits on how much a standard homeowners insurance policy will cover for items such as jewelry, silverware, collectibles and furs. For example, jewelry coverage may be limited to under $2,000. Some insurance companies may also place a limit on what they will pay for computers.

Check your policy (or ask your insurance professional) for the limits of your coverage for any expensive items. If your home inventory includes items for which the limits are too low, consider buying a special personal property floater or an endorsement. This will allow you to insure valuables individually or as a collection, with significantly higher coverage limits.

Determine how much additional living expense insurance you need
Additional Living Expenses (ALE) is a very important feature of a standard homeowners insurance policy. If you can't live in your home due to a fire, severe storm or other insured disaster, ALE pays the additional costs of temporarily living elsewhere. It covers hotel bills, restaurant meals and other living expenses incurred while your home is being rebuilt.

If you rent out part of your house, this coverage also reimburses you for the rent that you would have collected from your tenant if your home had not been destroyed.

Many policies provide coverage for about 20 percent of the insurance on your house. But ALE coverage limits vary from company to company.

Determine how much liability insurance you need
The liability portion of homeowners insurance covers you against lawsuits for bodily injury or property damage that you or family members or pets cause to other people, as well as court costs incurred and damages awarded.

You should have enough liability insurance to protect your assets. Most homeowners insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available and, increasingly, it is recommended that homeowners consider purchasing at least $300,000 to $500,000 worth of liability coverage.

If you own property and or have investments and savings that are worth more than the liability limits in your policy, consider purchasing a separate excess liability or umbrella policy.