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?
- How to Perform Your Own Home Insurance Estimate
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 paid 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, assuming you already own the real estate?
- 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 basis for the rates and limits of your home insurance policy is the market value of your house. This figure is typically the maximum amount of money you would be reimbursed under your dwelling coverage if your home were to be completely destroyed. However, when choosing the specific coverage to buy, you'll 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 market value, less depreciation. For example, imagine you installed a $5,000 water heater eight years ago, and that water heater recently ruptured. When you file a claim with your insurance company, you'll be filing a claim for an appliance worth $5,000, minus the depreciation in its value from eight years of wear and tear. Because of that adjustment, your insurance company might pay you as little as half the original price of the water heater, once depreciation is figured in. You'd be responsible for the difference, which could be a considerable amount if the depreciation was steep. Similarly, if your home were to be totally destroyed, and had depreciated in value, the payout could amount to less than you paid for the house, and perhaps even less than you still owe on its mortgage. 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:
- Electronics, such as TVs and speakers
- Kitchen appliances
- Power tools
Keep a list that includes each item and its replacement value. It’s useful, too, 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 exclusions, 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 covered by the vehicle's comprehensive auto insurance policy, assuming there is one. 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 category and item-specific 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 and how often you engage in high-liability activities. At-risk assets are the personal assets you own that are not specifically exempted from liability lawsuits by your state or the federal government. While there's no law or regulation connecting your net worth and the maximum amount for which you can be sued, people are more likely to bring a lawsuit if they think you can afford to pay; so the higher your net worth, the more coverage you'll want.
|Assets at Risk in a Lawsuit||Assets That May Be Protected from a Lawsuit|
|Vehicles titled in your name||401(k)s|
|Business assets that you personally own||Annuities|
|Non-dwelling real estate||Home equity|
|Future wages||Social Security benefits|
|Money saved in your bank accounts|
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 Amount||State Farm Total Monthly Rate|
If you you have a large amount of assets or regularly participate in high-liability activities, 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.
If you live in a flood zone, consider purchasing a flood insurance policy. Similarly, if you live in an especially humid region, consider purchasing additional mold insurance. These supplementary policies will increase your home insurance premiums, but they’ll also provide critical protection if one of the hazards they cover were to damage your home.