How to Estimate Your Homeowners Insurance

When making a homeowners insurance estimate, you should begin by considering the amount it would cost to totally rebuild your house at current prices for labor and materials. You should also calculate the value of all the personal belongings that could be destroyed were your house to sustain significant property damage. Finally, estimate the value of all the personal assets you risk losing were someone to file and win a liability lawsuit against you. These figures will help determine the amount of coverage you need to buy under your home insurance policy.

How Much Does Home Insurance Cost?

The average cost of homeowners insurance has risen by more than 50% over the past 10 years, with the nationwide average standing at $1,083 in 2018. However, rates differ significantly based on the state, neighborhood and specific home. For example, residents in Oregon paid an average of just $574 per year for their policies, while homeowners in Florida almost four times as much, at $2,055. The sharply higher figure for Floridians is likely due to such regional risks as hurricanes, and to special coverage needs, such as mold damage insurance due to the state’s high humidity.

How to Perform Your Own Home Insurance Estimate

Begin to calculate what it might cost to insure your home by addressing a number of questions about your house, personal property and regional risks. These include:

  • How much would it cost to rebuild your house today?
  • What regional risks, such as high humidity, or a propensity to flooding or fire, pose a risk to your home?
  • What is the total value of your personal property, excluding vehicles?
  • What is the total value of your at-risk assets, if someone were to sue you?

Your answers to these questions will help determine the limits you require for the underlying coverages that make up your home insurance policy. These coverages include:

  • Dwelling Insurance: Coverage for your house and its components, such as its roof, plumbing and built-in appliances.
  • Personal Property Insurance: Coverage for your personal belongings, such as clothing or TVs.
  • Liability Insurance: Coverage if someone is injured on your property, and files a lawsuit against you.

What is the Replacement Cost of Your Home?

The replacement cost of your home is the dollar amount it would cost to build a new version of your house if it were completely destroyed—and you should carry enough dwelling coverage to match that amount. Your home's replacement cost is different from your home's resale value. Typically, your home's replacement cost will be less than the sale value, since the land your property sits on (and its location) dictate much of the value of your property.

Calculating the exact replacement cost of your home is complex, and most of the time, home insurance companies will use a combination of publicly available data and information you supply to determine your home's replacement cost for you.

Additionally, insurers often perform inspections on newly insured properties, in order to confirm that the coverage level your purchased corresponds to the coverage you need, and that the company is charging you the right price for insurance.

For more insight into how a replacement cost is calculated, you can hire an independent professional who is familiar with local building costs to put together an estimate for you, or create one yourself.

Creating Your Own Home Replacement Cost Estimate

If you'd like to come up with your own estimate, start by finding out the average cost to build a home per square foot in your area, then multiply that by the square footage of your house. The average cost to build a home in the U.S. is around $150 per square foot, but varies greatly around the country.

From there, you'll also need to calculate the cost of the major components of your home. The cost of these components varies greatly around the country, so you'll need to contact local suppliers for this information as well.

  • Exterior features like siding and stonework
  • Roof
  • Flooring, especially if you have high-end hardwood floors
  • Cabinets and interior fixtures

Home Insurance Coverage Limits

When choosing the specific coverage to buy, you'll also need to choose among three policy limits that dictate how much of your house's value your insurance company is required to cover if your home is damaged or destroyed.

  • Actual Cash Value (ACV): The ACV of your house is its total cost to rebuild, minus depreciation. Consider a water heater as an example. Imagine you bought a $500 water heater eight years ago, and that water heater was damaged in a fire. When you file a claim, your insurance company would pay you enough to buy an eight-year-old water heater equivalent to the one you had. If the water heater had depreciated in value by 50%, you'd get a check for $250. Of course, buying an eight-year-old water heater is probably not advisable, so in practice you are likely to pay the remaining money owed yourself. . Similarly, if your home were to be totally destroyed, you will generally have to pay the difference between the depreciated value and the replacement cost. Unsurprisingly, ACV is the least expensive limit option.
  • Replacement Cost Value (RCV): The RCV of your house is the amount it would cost to rebuild it at today's prices. While more expensive than a policy that insures only your home's actual cash value, a policy with RCV coverage could provide a substantial amount of additional reimbursement were your home to be damaged or destroyed. It also protects you against depreciation gaps such as the one cited above for the failed water heater. However, even RCV coverage could fall short of fully reimbursing your replacement costs were a localized disaster to cause costs for labor and materials to rise to levels that are beyond your home's replacement cost limit.
  • Guaranteed Replacement Cost (GRC) / Extended Replacement Cost (ERC): The GRC/ERC guarantees that your insurance company will, as needed, pay a certain percentage above your home's replacement cost if a regional disaster, such as a fire, temporarily drives up the cost of labor and materials in your area. This additional protection naturally comes at a price, and this is the most expensive policy limit you can choose.

For example, if the cost to rebuild your house today is $200,000, you should purchase the same amount of dwelling insurance. If you can afford it, we recommend you elect RCV coverage for your policy's limit.

What is the Replacement Cost of Your Property?

Generally, homeowners insurance companies set the limit for your personal property insurance at between 50% to 75% of that for your dwelling coverage. So if, for example, your dwelling coverage limit is $200,000, your personal property coverage limit would likely be between $100,000 and $150,000, depending on the company and policy you choose.

Whether this amount is sufficient for you naturally depends on the value of your personal belongings. To estimate how much personal property insurance you need, conduct an inventory of the personal possessions you need to be covered under the policy. These include, but are not limited to, the following:

  • Clothing
  • Electronics, such as TVs and speakers
  • Kitchen appliances
  • Power tools
  • Furniture
  • Artwork
  • Jewelry

Keep a list that includes each item and its replacement value. It can also be useful to walk through your home, photographing your most important and valuable possessions as you go. This documentation will help you to remember items you've lost if they’re stolen or destroyed, and will also serve as proof of possession in the event of a claim.

However, it's important to note that certain items may not be covered by your policy. Vehicles, for example, are a notable exclusion, since they're covered by their own insurance policies, even if they are parked in your garage or elsewhere on your property. If your car was damaged in a home fire, it would be paid for by the vehicle's comprehensive auto insurance coverage, if you have it. Similarly, a boat parked beside your home that was damaged or destroyed would only be partially covered—typically up to about $1,500. You'd need a boat insurance policy to cover the additional value.

Additionally, high-value items, such as furs, artwork and jewelry are subject to additional limits. For example, your home insurance policy may specify that jewelry will only be covered up to a total of $2,000, and only up to $1,000 per individual piece. If these limits are insufficient for your possessions, you can obtain additional coverage in the form of a property schedule or endorsement.

Once your inventory is complete, you’ll have a better idea of how much personal property insurance you need. It’s wise to submit the inventory to your insurance company, so that they have documented proof of your belongings. This will aid any property insurance claims you make in the future. Update the inventory annually to account for items you've added or removed from your home.

What is the Total Value of Your At-Risk Assets?

The amount of personal liability insurance you require depends on the total value of your at-risk assets. These are the personal assets you own that are not specifically exempted from liability lawsuits by your state or the federal government.

Assets at Risk in a LawsuitAssets That May Be Protected from a Lawsuit
Vehicles titled in your name401(k)s
BoatsIRAs
Business assets that you personally ownAnnuities
Non-dwelling real estateHome equity
Future wagesSocial Security benefits
Money saved in your bank accounts
Investments
Personal belongings

Most of your belongings are at risk if you're sued and don't have adequate liability insurance. However, some assets, such as retirement funds, may be exempt from lawsuits. Each state has different rules regarding how protected retirement funds are from legal actions, so you should review local laws to determine what is at risk. For example, 401(k) funds are better protected than IRAs in California. So Californians might need to include at least some of their IRA investments in their estimate of their total at-risk assets.

Most home insurance companies offer a minimum of $100,000 of liability coverage, and allow that amount to be increased to between $300,000 and $1 million. The difference in premium when you opt for higher liability coverage can be small, so we recommend choosing higher limits on your policy if you can afford it. For example, here are some sample costs of different liability insurance limits at State Farm:

Liability AmountState Farm Total Monthly Rate
$100,000$57.17
$300,000$59.33
$500,000$61.50
$1,000,000$64.08

If your total assets exceed the limit of your home insurance policy's liability clause, consider purchasing an umbrella policy to provide extra liability protection. For example, if someone files a lawsuit against you for $1 million, and your home insurance policy has a $500,000 limit, you'd be liable for the additional $500,000. But if you have an umbrella policy that provides supplemental coverage of up to $1 million, your umbrella policy would pay the additional $500,000 after your liability coverage is exhausted.

What Regional Risks are Excluded from My Policy?

Finally, you should consider if any regional factors pose a risk to your house, and whether those threats are excluded from a standard home insurance policy. Most home insurance policies have an open peril list of covered events that protect against most common disasters. However, hazards such as regional flooding are typically excluded, and require a separate policy in order to gain coverage.

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