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How to Estimate Your Homeowners Insurance

How to Estimate Your Homeowners Insurance

Compare home insurance quotes to get the best prices for the amount of coverage you need.

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When you're estimating how much homeowners insurance you need, consider the value of:

  1. completely rebuilding your house at today's prices for labor and materials,
  2. your personal belongings,
  3. all the personal assets that would be at stake if someone won a liability lawsuit against you.

Put together, these three figures help determine the amount of coverage you need to have in your home insurance policy.

How much does home insurance cost?

The average cost of homeowners insurance has risen by more than 47% over the past 10 years, with the nationwide average standing at $1,445 in 2020. Your rates may be significantly different than the national number depending on many factors, like your location, your home's building material and the amount of property you're insuring.

Comparing homeowners insurance rates in three very different states offers a glimpse of how these factors can work.

Average annual policy
New York$974
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A home's risk of damage directly affects the cost to insure it. Greater risk leads to more insurance claims, which in turn drives rates higher. Both Texas and Florida's exposure to frequent, powerful storms make these states more expensive markets for home insurance. New York sees lower rates, partly thanks to its lower exposure to damaging wind events.

How to perform your own home insurance estimate

Estimating your homeowners insurance premium starts with asking yourself 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 you determine the coverage limits you need in your home insurance policy.

A homeowners insurance policy is split into three coverages, which protect different parts of your property. These coverages include:

  1. Dwelling insurance, which covers your house and its components, such as its roof, plumbing and built-in appliances.
  2. Personal property insurance, which covers personal belongings such as clothing and furniture.
  3. Liability insurance, which covers legal costs if someone files a lawsuit against you for causing injury through negligence.

Purchasing more coverage means higher costs, but at the same time, it's important to insure the full value of your home and belongings. Answering the questions above honestly and accurately will help you choose home insurance coverage that's both affordable and sufficient.

What is the replacement cost of your home?

The replacement cost of your home is the dollar amount it would cost to rebuild your house if it were completely destroyed. You should carry enough dwelling coverage to match that amount.

Your home's replacement cost is typically lower than your home's resale value, since it doesn't include the value of the land your property sits on.

Calculating the exact replacement cost of your home is complex. Usually, home insurance companies will use a combination of publicly available data and information you supply to determine your home's replacement cost for you. Insurers often inspect newly insured properties to confirm that the coverage you purchased matches the amount you actually need.

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

Creating your own home replacement cost estimate

If you'd like to come up with your own estimate, find out the average cost per square foot of building a home in your area and multiply that by the square footage of your house. While the nationwide average is around $150 per square foot, costs can vary greatly from state to state.

Next, calculate the cost of the major components of your home. The cost of these components also varies, so you'll need to contact local suppliers for this information.

  • Roofing
  • Exterior features: siding, stonework
  • Flooring: carpet, tile, hardwood
  • Cabinets and interior fixtures

Home insurance coverage limits

When choosing the specific coverage to buy, you'll also need to choose one of three different policy types, which dictate how much of your house's value you receive if your home is damaged or destroyed.

Actual cash value (ACV) is the total cost to rebuild minus depreciation.

For example, imagine you bought a $500 water heater eight years ago. If that heater breaks down, 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.

In practice, buying an eight-year-old water heater is usually not advisable, so you'll probably have to pay the difference out of pocket. Similarly, if your home were totally destroyed under an actual cash value policy, you would pay the difference between the depreciated value and the replacement cost. These limitations of ACV coverage also make it quite cheap.

Replacement cost value (RCV) is the amount it would cost to rebuild your house, based on prices at the time you start your policy. More expensive than an actual cash value policy, replacement cost coverage guarantees that your claim won't be reduced to account for depreciation.

However, even replacement cost value coverage can fall short of a full reimbursement if a local disaster causes a spike in the cost of labor and materials. This is where the next level of home insurance coverage comes in.

Having guaranteed or extended replacement cost (GRC or ERC) coverage means that your insurance company will pay a certain percentage more than your home's replacement cost if a regional disaster 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.

What regional risks are excluded from my policy?

You should consider whether 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.

What is the replacement cost of your property?

Generally, homeowners insurance companies set the limit for your personal property insurance at between 50% and 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 are a notable exclusion, since they're covered by their own insurance policies even when they're parked in your garage or your driveway.

If your car is damaged by your garage catching fire, for example. The comprehensive coverage in your auto insurance will pay for the damage to the car, while the garage itself is covered by homeowners insurance.

High-value items such as furs, artwork and jewelry are subject to individual limits on categories and sometimes individual items. If these limits — which typically run in the thousands of dollars — are insufficient for your possessions, you can purchase a schedule or endorsement to expand coverage in specific categories.

Once you've taken an inventory of all your things, you’ll know how much personal property insurance you need. Submitting your inventory to your insurance company can serve as documented proof of your belongings. This will support any property insurance claims you make in the future. Update the inventory annually to account for items you've added or removed.

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 lawsuit
Assets that may be protected
Vehicles titled in your nameEmployer-sponsored 401(k)
Business assets you personally ownAnnuities
Investment real estateHome equity
Future wagesSocial Security benefits
Money saved in your bank accounts
Personal belongings

Without adequate liability insurance, most of your belongings are at risk if you're sued. 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, in California, 401(k) funds are better protected than IRAs, which means you might need to consider at least some of your IRA investments when estimating your 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's total monthly rate

Rates based on a one-time sampling of State Farm home insurance premiums from Quadrant Information Services. Your own rates may be different.

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 instance, 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 remainder after your liability coverage is exhausted.

Frequently Asked Questions

How much coverage does the average homeowner need?

The median value of a U.S. home is about $245,000, but the cost of rebuilding a typical house will be higher or lower depending on the price of labor and materials. An average homeowner would need enough structure coverage to rebuild the house, along with tens of thousands in personal property coverage for the belongings inside.

How much does home insurance usually cost?

The average cost of homeowners insurance in the U.S. is $1,445 per year, based on a typical level of coverage. This puts the average monthly premium at around $120, but keep in mind that insurers adjust their pricing in response to some highly local factors such as your level of exposure to natural disasters.

Can I reduce my home insurance if my mortgage is paid off?

While it's true that you aren't legally required to have homeowners insurance if you don't have a mortgage on your house, it's not a good idea to do away with your coverage for that reason. If you are a debt-free homeowner, that's all the more reason to make sure that your property is fully protected by insurance. Otherwise, you would be on the hook for the entire amount of any damage the house suffers.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.