How much homeowners insurance do I need?

How much home insurance you need depends on the cost to fully rebuild your home’s structure, replace your belongings, and protect your personal assets from liability lawsuits. Ideally, the dwelling coverage portion of your policy should equal 100% of your home’s estimated replacement cost — which is different from its market value — to make sure you can rebuild after a total loss. 

However, construction costs are constantly changing, so your policy limits need to be updated periodically to reflect current material prices and local labor rates. Matching your policy limits to these costs ensures that you won't face devastating out-of-pocket expenses, even after a major loss.

Determining how much home insurance coverage you need

Choosing the right amount of home insurance starts with understanding what each part of your homeowners policy protects and how insurers calculate coverage limits. Home insurance is typically broken down into several coverage areas labeled Coverage A through F. These include coverage for your home itself (the dwelling), other structures on your property, personal belongings, additional living expenses, personal liability, and medical payments.

If something unexpected happens, you’ll want enough homeowners insurance to rebuild your home, replace your stuff, cover extra living expenses if you can’t stay there, and protect your finances if you’re held responsible for damage or injuries to others. Having enough coverage in each area helps ensure you’re not left paying out of pocket after a major loss.

Here’s what to know about each coverage type and the factors that help determine appropriate coverage limits.

Dwelling coverage

Dwelling coverage (Coverage A) protects the physical structure of your home, including walls, floors, the roof, and built-in systems such as plumbing, electrical, and some major appliances. You should have enough dwelling coverage to rebuild your home from the ground up after a total loss, like a fire that engulfs the entire structure.

You’ll need to provide your insurance company with information about your home so they can use their valuation tool to determine a minimum coverage amount. Factors that influence rebuild costs and your dwelling coverage amount include:

• Local labor, construction, and materials costs

• Your home’s square footage

• The design and complexity of your home

• Building codes and permit requirements

• Value-added improvements like renovating your kitchen or adding a second bathroom

Note: Insurance companies do not use the market value (potential selling price) of a home in determining its replacement cost, because the market value includes the land value. Home insurance doesn’t cover the land, only what’s on it.

Other structures

Other structures coverage (Coverage B) protects buildings on your property that are not attached to your home, including:

• Detached garages

• Sheds

• Fences

• Gazebos

• Guest houses

• In-ground pools (in most cases)

• Driveways

• Patios 

• Barns 

• Outdoor kitchens

Coverage B is typically set at 10% of your dwelling coverage. For example, if your dwelling coverage is $300,000, you’d have a $30,000 limit for damage to other structures. If you need more coverage, you can increase Coverage B to an amount that will cover all other structures on your property.

Actual cash value vs. replacement cost value

In addition to knowing what is covered, it’s important to understand how those items are valued during a claim. Standard homeowners insurance (called HO-3 policies) typically cover your dwelling and other "roofed-and-walled" structures — like a detached guest house or shed — on a replacement cost value (RCV) basis. This means the insurer pays to repair or replace the damage at today’s prices without deducting for the age or wear of the materials, up to your policy limits.

However, non-building structures on your property, such as fences, driveways, or awnings, are often covered on an actual cash value (ACV) basis. For these, the insurer subtracts depreciation from your payout, reflecting their used value at the time of loss. If you prefer RCV protection for all your property, you may be able to add that coverage to your policy (called an endorsement) for an additional cost.

Note: Regardless of whether you carry RCV or ACV coverage, you are responsible for your deductible. Rather than paying this to the insurer, the amount is subtracted from your final claim settlement.

Replacement cost coverage options

Your insurer may offer extended replacement cost, which pays 20% to 50% above your dwelling limit if rebuilding costs rise, or guaranteed replacement cost, which covers the full rebuild cost even if it exceeds your policy limit. These extended coverages are especially useful in disaster-prone areas, where widespread losses can cause labor shortages and sharp increases in materials and labor costs.

Let’s say your home is a total loss after a hurricane, and you have $400,000 in dwelling coverage, but it costs $500,000 to rebuild. If you have extended replacement cost of 25%, your insurance company would pay the additional $100,000. If not, then you’d have to pay the difference. Guaranteed replacement cost would also cover the extra cost, even if it exceeds $500,000, since there’s no coverage limit.

Personal property

Personal property coverage (Coverage C) protects your belongings, including furniture, clothing, electronics, and appliances. Coverage C usually defaults to 50% to 70% of your dwelling coverage, but you can typically increase it if you need more coverage for your stuff.

To determine the right coverage amount:

• Create a home inventory

• Estimate replacement costs for older and more expensive items

• Consider high-value items that may need additional coverage or an endorsement

In a standard policy, personal property is typically covered on an ACV basis. If you don’t want to worry about depreciation factoring into personal property claims, it may be worth paying extra for RCV coverage.

Loss of use/additional living expenses

Loss of use coverage (Coverage D) helps pay for temporary living expenses if your home becomes uninhabitable due to a covered loss. It covers additional costs you may incur, such as:

• Hotel or rental costs

• Food expenses

• Laundry and transportation costs

• Pet boarding

Coverage limits are typically 20% to 30% of your dwelling coverage. It will help pay for the additional expenses you incur while displaced from your home due to a covered event, up to your policy limit.

Personal liability

Personal liability coverage (Coverage E) protects you if you or your family is found legally responsible for injuries or property damage to others. Coverage E can help pay for medical expenses, property replacement, and legal fees and settlements if you’re sued.

The amount of coverage you need depends on your net worth and risk exposure. The higher your net worth and risks (pets, pools, trampolines, teen drivers, frequent guests, etc.), the more coverage you’ll need to adequately protect your finances.

Minimum coverage generally starts at $100,000, but carrying at least $300,000 is recommended. You can also choose higher amounts, such as $500,000 or $1 million. Anything higher and you’ll usually need a separate umbrella insurance policy.

Medical payments to others

Medical payments coverage (Coverage F) pays for medical costs if a guest gets injured while on your property. It differs from personal liability because you don’t have to be at fault for your insurer to pay the claim. Because of this, payouts are typically disbursed faster, and lawsuits can often be prevented. 

The base coverage is usually $1,000 per claim, but you can increase it up to $5,000 per occurrence for an added premium.

Other homeowners insurance coverages you might need

Standard policies don’t cover everything. The following add-ons can help fill coverage gaps, depending on your situation:

• Water backup coverage: Helps pay for damage caused by backup of sewer or drains and sump pump failures
• Flood insurance: Covers damage from flooding (some insurers offer this as an add-on; others require a separate policy)
• Earthquake coverage: Covers damage from earthquakes, landslides, mudslides, and other seismic events
• Ordinance or law coverage: Pays for required code upgrades during repairs in a covered claim
• Equipment breakdown coverage: Covers repairs or replacement of appliances or systems after sudden failures
• Scheduled personal property coverage: Covers high-value items like art, collectibles, electronics, and jewelry for their appraised value

Frequently asked questions

How does named perils vs. open perils coverage compare?

Named perils coverage only covers losses caused by specific listed events in your policy. Open perils coverage covers all losses except those specifically excluded. Open perils coverage offers broader protection and typically applies to dwelling coverage. Named perils coverage is more common for personal property.

What is the 80/20 rule for home insurance?

The 80/20 rule for home insurance means insurers expect you to insure your home for at least 80% of its replacement cost. If you fall below that threshold, you may get a lower claim payout, even for partial losses. Because of this, insuring your home for its full replacement value is recommended. The slight bump in the annual cost of your policy is likely negligible compared to the potentially devastating out-of-pocket costs you’d face if your coverage falls short during a major claim.