Should I Over Insure My Home?

Determining how much insurance you need to cover your home in the event of a loss can be tricky business. You want enough to insure your home so you're able to recoup the cost of having to build a new one after a disaster, but not so much that you'll be paying too much money in premiums every year.

The Necessities

There are home insurance companies in the market today who sell insurance to cover every nook and cranny, but there are really only a few things that are essential to cover.

  • The cost of rebuilding your home
  • Personal liability to cover those injured on your property
  • Coverage to replace lost possessions
  • Living expenses incurred during your home’s repairs

Everything after this is optional and based on your specific needs.

Dwelling Coverage

Your dwelling coverage is the part of your insurance package that pays for repairs to the structure of the home itself. When choosing the amount of dwelling coverage you need, you should choose the number that’ll cover the cost to replace your home. Some insurers will try to tell you to buy a coverage amount equal to the mortgage or loan amount.

Dwelling coverage equal to these amounts could easily end up overpaying you in the event of a disaster. Typical insurance packages have dwelling coverage to ensure only the actual structure of your home is covered because, even if your house burns down or floods, your land usually won’t go anywhere. Choosing coverage based on the mortgage amount, which covers both house and land, will pay you back for both, even if your land is not destroyed.

Your dwelling limit should not be determined using the purchase, appraised, or estimated selling price of your home. The only number you should be concerned about when choosing dwelling coverage is how much it would cost to rebuild your existing structure.

Personal Liability

Homeowners insurance will often include protection for personal possessions, but it’s up to you to ensure you have adequate coverage. When choosing personal possession coverage, consider how much you spent to furnish your home and the price of other expensive items you own.

A good rule of thumb is to purchase coverage between 50 to 75 percent of what you choose for your dwelling coverage. This should be enough to cover the possessions in the average home, which works well unless you have highly expensive tastes in décor.

Liability Coverage

Liability coverage is an important part of your homeowners insurance policy. It protects you in case someone is injured in your home. The risks of someone being harmed in your home, and suing for damages, is why it’s important to make sure you have adequate liability coverage. Typical liability coverage should fall between $100,000 and $300,000, depending on the size of your home.

Determining how much insurance you need to cover your home in the event of a loss can be tricky business.

Extra Living Expenses

The cost to cover your living expenses after a disaster is often referred to as Additional Living Expenses (ALE) or Loss of Use coverage. It’s designed to pay for things while your house is being rebuilt, like your rent.

ALE should be enough to cover the cost of living for about two years. When comparing the cost of coverage, divide the total amount by 24 months to see which company offers the most bang for your buck. Remember, ALE needs to be just enough to cover the cost of renting a unit in your area. It’s only temporary, so overpaying for a rental similar to your house might not make sense.

Things to Keep in Mind

The value of your home and how much money it would take to rebuild it after a disaster are the key factors in making sure you don’t over insure your house. Market values shift each year and the cost of building homes changes with them, so what you paid for your home 10 years ago will likely be different than its worth now.

You may need to increase your insurance over time to compensate for the cost of inflation. If you’ve done any renovations since purchasing your home, you’ll also need to reevaluate the worth of your property. Insurance companies often require you to report any renovations to your house worth over $5,000, though you should consider reporting any renovations.

If you find yourself confused as to how much insurance is just right for your home, our agents can help you determine the best amount of coverage for you.