- When it comes to estimating homeowners insurance, dont simply get the fair market value or appraised value.
- Consider your deductible, dwelling coverage, and increased labor and material costs.
- Calculate personal property coverage, liability coverage, and actual cash value versus replacement cost.
- See Insider's guide to the best homeowners insurance companies.
Although homeowners insurance isn't required by law, if you have a mortgage , your lender will require homeowners insurance to protect the investment.
Determining how much homeowners insurance depends on the type of home your purchase — condo , mobile home , townhome , or single family and goes beyond the appraised value of your home.
How to estimate how much homeowners insurance you need
When it comes to estimating how much homeowners insurance they need, most people only focus on the price to repair or rebuild the home itself, referred to as dwelling coverage . When estimating the cost of homeowners insurance, do not simply get the fair market value (FMV) or appraised value and stop there.
You also need to consider your deductible , dwelling coverage, increased labor and material costs, personal property coverage, liability coverage, and actual cash value versus replacement cost.
The four basic elements of homeowners insurance are: (1) dwelling coverage ; (2) personal property coverage ; (3) personal liability coverage ; and (4) additional living expenses if you need to temporarily relocate because your home is uninhabitable.
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Personal property coverage protects your belongings and furnishings from damage due to covered events, known as insurance perils like theft , fire , lightning , hail , and vandalism. Basic personal property coverage is usually $100,000, but if you have specialty items like high-end electronics, jewelry or fine art, these will be excluded from basic coverage requiring add-on coverage known as a personal effects rider or separate jewelry insurance .
Personal liability coverage offers homeowners protection if someone is injured at your property or sues for damages and is typically $100,000. If you have a swimming pool , exotic pet , or certain dog breed , this probably isn't enough coverage and may require an umbrella policy .
How to estimate dwelling coverage
Your dwelling consists of your home and any other structures on the property, like a garage or shed. If you purchased a condo, the association is the owner of the building and common areas. Therefore, dwelling coverage for a condo/co-op is through the condo association's master policy. In this respect, condo insurance is similar to renters insurance , insuring your unit and belongings inside your unit.
Dwelling coverage is based on the cost to repair or rebuild your home in the event that it's damaged due to an insurance peril , like theft, fire, or a storm. That is why the cost of homeowners insurance varies based on the type of dwelling you have. Vintage and heritage homes come with charm — and rules and regulations for historic dwellings, making the cost to repair or rebuild more costly.
Additionally, if you have a mortgage , your lender may have a preference for the amount of coverage.
The cost to repair or rebuild your home is based on several factors:
- Age of your home — older homes usually need more maintenance
- Age of your roof — roof repair can be costly
- Appraised value of your home — get a good appraisal to make sure it's not undervalued
- Location (urban vs rural) — materials may not be readily available in certain areas
- Size of your home — a smaller home requires less materials to repair or rebuild
- Labor and building materials.
Another factor that will impact your dwelling coverage is whether your home is located in a disaster prone weather zone.
Homeowners in disaster-prone areas will have increased costs
Homeowners in disaster-prone areas will have increased costs. Typically during a natural disaster, the supply chain is disrupted causing the price of materials, supplies, and labor to increase. This needs to be accounted for in your annual review of your homeowners insurance.
Additionally, if a home is in a risk area — floods , hurricanes , wildfires , mudslide , tornadoes , hail, and earthquakes — you will need additional or separate coverage because these disasters are not typically covered risks. It is important to make sure you have good coverage, an up-to-date policy, understand the risks, and have evacuation plans ready.
Unfortunately, with climate change and an increase in natural disasters like wildfires, some California homeowners insurance companies are dropping customers . This is why most flood insurance is issued through FEMA because many insurance companies didn't want to insure homeowners in flood zones.
Understand your homeowners insurance deductible
Your deductible is subtracted every time you make a homeowners insurance claim. Having a deductible higher than $1,000 reduces your annual premium. However, if you have a loss and make a claim, you will have a larger portion deducted from your payout. This is an important consideration if your home is located in weather zones or disaster-prone areas where you can have multiple claims in a year.
If you have a dollar amount for your deductible, this would be deducted from your claim. For example, your home is damaged by a storm and the insurance company calculates your loss at $15,000 to repair the damage. If your deductible is $500, the insurance company will pay you $14,500.
If your deductible is a percentage, like 2%, then this amount would be deducted from your claim. If your house was insured for $500,000 with a 2% deductible, you would have $10,000 deducted from each claim. For example, if you have a $15,000 loss, the insurance company would deduct $10,000 from your loss and pay you $5,000.
In addition to your standard homeowners insurance deductible , there are other separate deductibles for windstorm insurance riders , flood insurance , hurricanes , and earthquake insurance .
Actual cash value vs. replacement cost
It's important to find out if your policy offers replacement cost or actual cash value (ACV). Homeowners and renters insurance policies typically use "replacement cost" when paying out for covered damage. Replacement cost is the cost to replace the item with a new or used product.
Actual cash value takes into consideration depreciation of the item. For example, if a leather sofa is damaged by flood, the actual cash value takes into consideration depreciation of the item. Actual cash value is usually lower than the replacement cost value.
Many homeowners insurance companies, like Nationwide offer better roof replacement and guaranteed replacement cost , sometimes at an additional cost.
If you have flood damage, flood insurance is based on the actual cash value.
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