How much home insurance do I need? A complete guide

Sarah thought she had everything covered. She’d bought her first home two years ago, signed up for homeowners insurance through her mortgage lender and hadn’t thought much about it since. Then a kitchen fire destroyed half of her house. When the insurance adjuster delivered the news that her dwelling coverage would only cover about 60% of the rebuilding costs, Sarah faced a devastating reality: She was underinsured by nearly $150,000 and unsure how she was going to cover such a large expense.

How do you know if you have enough home insurance? The question seems simple, but getting it wrong could mean financial hardship. Understanding the key factors that determine how much coverage you actually need and how to avoid coverage gaps protects both your home and your finances.

Why the right amount of home insurance matters

Many homeowners assume their policy will cover everything if disaster strikes, but that’s not always the case. Being underinsured can leave you paying tens of thousands of dollars out of pocket to rebuild or replace belongings. On the flip side, insuring means paying for coverage you don’t need. Here’s why getting the coverage amount right is critical:

• You’re protected from financial hardship – A total loss without adequate coverage could drain savings or force you into debt.
• You avoid disputes with your insurance company – Insufficient coverage can complicate claims and reduce payouts.
• You maintain your lifestyle after a loss – Proper coverage means you can rebuild or replace after a loss without compromise.
• You meet lender requirements – If you have a mortgage, your lender requires a minimum level of coverage, but that minimum may not be enough.

Being underinsured means your home insurance policy doesn’t cover the full cost to rebuild your home or replace your belongings after a covered loss. This leaves you responsible for paying the difference out of pocket, which can amount to tens or even hundreds of thousands of dollars.

What does home insurance actually cover?

Before you can calculate how much coverage you need, it’s important to understand what homeowners insurance actually protects. A standard policy is divided into several coverage types, each serving a different purpose. Knowing what’s included and what’s not helps you identify potential gaps. Not all policies are created equal, and the coverage amounts you choose will directly impact your financial protection. Let’s break down the main components.

Dwelling coverage

Dwelling coverage is the foundation of your home insurance policy and the core of determining how much coverage you need. It pays to repair or rebuild the physical structure of your home if it’s damaged or destroyed by a covered peril like fire, windstorm or hail. This includes your roof, walls, built-in appliances and attached structures like a garage.

However, dwelling coverage doesn’t protect everything. It excludes land value, detached structures like sheds and damage from perils like floods or earthquakes. If your dwelling coverage is too low, you’ll be responsible for paying the difference to rebuild after a total loss. This is why choosing the right amount is one of the most important insurance decisions you’ll make.

Personal property coverage

Personal property coverage protects your belongings, furniture, clothing, electronics and more, if they’re damaged, destroyed or stolen. Most policies cover personal property at 50% to 70% of your dwelling coverage amount, but you can adjust this based on what you own. For example, if your dwelling coverage is $300,000 and your personal property is set at 70%, you’d have $210,000 in coverage for your belongings. Whether you’re insuring a house full of hand-me-down furniture or an apartment filled with high-end electronics, this coverage adapts to your needs.

You’ll need to choose between replacement cost or actual cash value coverage when setting up your policy. Replacement cost pays to replace your belongings with brand-new items at today’s prices, without deducting for depreciation. Actual cash value subtracts depreciation based on age and wear and tear, paying only what your items were worth at the time of loss. This can be significantly less. Most policies default to actual cash value for personal property, but you can upgrade to replacement cost coverage for a higher premium. While replacement cost coverage costs more upfront, it means you won’t have to pay out of pocket to replace your belongings after a loss.

Keep in mind that certain valuables have coverage limits. Jewelry, art, collectibles and high-end electronics often have sub-limits, meaning you may need to add scheduled personal property endorsements to fully protect them. The good news? Your belongings are usually covered even when they’re not at home, like stolen luggage during travel or a laptop taken from your car.

Liability coverage

Liability coverage protects you if someone is injured on your property or if you accidentally damage someone else’s property. It covers legal fees, medical bills and settlements up to your policy limit. Standard policies typically include $100,000 to $300,000 in liability coverage, but many experts recommend at least $500,000 or even $1 million.

Here’s what liability coverage includes:

• Personal liability protection – Covers bodily injury and property damage claims when you’re found legally responsible.
• Medical payments to others – Covers minor injuries without a liability claim.
• Legal defense costs – Your insurance company pays for attorneys and court costs if you’re sued.

Additional living expenses

If your home becomes uninhabitable due to a covered loss, additional living expenses (ALE), also called loss of use coverage, pays for temporary housing, meals and other costs while your home is being repaired. This coverage typically equals 20% to 30% of your dwelling coverage and can be a financial lifesaver during extended displacement. For example, if your dwelling coverage is $400,000 and your ALE is set at 20%, you’d have $80,000 available to cover temporary housing, restaurant meals and other living expenses while your home is rebuilt.

How to calculate the right dwelling coverage amount

Your dwelling coverage should reflect the current cost to rebuild your home from the ground up, not its market value or the amount you paid for it. Many homeowners make the mistake of insuring based on their home’s sale price, which includes land value that’s not covered by insurance. Rebuilding costs depend on square footage, materials, local labor rates and construction complexity. To avoid being underinsured, you need an accurate replacement cost estimate. The VIU by HUB Advisory Team can help you make decisions and get the coverage you want, but here’s what you should consider.

Start with a replacement cost estimate

A replacement cost estimate calculates what it would cost to rebuild your home today using similar materials and construction methods. Your insurance company may provide an estimate, but it’s worth getting a second opinion from a local contractor or using an online replacement cost calculator. Keep in mind that rebuilding costs have risen significantly due to inflation, labor shortages and supply chain issues.

Here’s how to get an accurate estimate:

• Use a replacement cost calculator – Tools from insurance carriers or third-party services can give you a ballpark figure.
• Get a professional appraisal – A certified appraiser or contractor can provide a detailed, accurate estimate.
• Account for unique features – Custom finishes, high-end materials and historical details increase rebuilding costs.
• Review annually – Rebuilding costs change, so update your estimate every year or after major renovations.

Getting an accurate estimate is your first step toward making sure you’re not left with a coverage gap when you need your policy most.

Understand the insurance-to-value ratio

The insurance-to-value ratio (ITV) compares your dwelling coverage to your home’s actual replacement cost. Insurance companies typically require an ITV ratio of at least 80% to avoid penalties and make sure you receive full claim payouts. Falling below this threshold can mean you’ll receive less than you need, even for partial losses.

For example, if your home’s replacement cost is $400,000 and you have $300,000 in dwelling coverage, your insurance-to-value ratio is 75%, which falls below the recommended 80%. If you’re underinsured, your insurance company may reduce your claim payout proportionally through coinsurance penalties, meaning you could receive less than the full amount needed to cover your loss.

To avoid being underinsured, aim for an insurance-to-value ratio of at least 80%, but ideally, insure your home for 100% of its replacement cost to make sure you have full protection in the event of a total loss.

Consider guaranteed or extended replacement cost coverage

Standard dwelling coverage has a limit, and if rebuilding costs exceed that limit, you’re responsible for the difference. Guaranteed replacement cost coverage removes that cap entirely, paying whatever it takes to rebuild your home, though it’s not available in all states or for all homes. Extended replacement cost coverage adds a buffer, typically 125% to 150% of your dwelling limit, to account for unexpected cost increases. Both options cost more, but they provide critical protection against inflation and the risk of being underinsured. If you live in an area with high construction costs, own a home with historic features or face frequent natural disasters, these coverage options are worth the extra premium.

How much personal property coverage do you need?

Personal property coverage is often a set percentage of your dwelling coverage, but that doesn’t mean it’s enough for your needs. If you own valuable furniture, electronics, clothing or collectibles, you may need to increase this coverage or add scheduled endorsements. The key is taking an inventory of what you own and estimating what it would cost to replace everything. Here’s how to approach it.

Take a home inventory

A home inventory is a detailed list of everything you own, ideally with photos, receipts and estimated values. This not only helps you determine how much personal property coverage you need but also speeds up the claims process if something happens. Taking the time to create and maintain this inventory can save you thousands of dollars and weeks of frustration if you ever need to file a claim.

Decide between replacement cost and actual cash value

Replacement cost coverage pays to replace your belongings with new items of similar kind and quality. Actual cash value coverage factors in depreciation, meaning you’ll receive less money. Sometimes significantly less. While replacement cost policies cost more, they provide much better financial protection. For example, a five-year-old laptop stolen from your home might cost $1,200 to replace, but its actual cash value may only be $400 after depreciation. That $800 difference could be the deciding factor in whether you can afford to replace what you’ve lost. Most experts recommend replacement cost coverage for personal property if it fits your budget.

Replacement cost coverage pays to replace your belongings with new items, while actual cash value coverage deducts depreciation and pays only what your items were worth at the time of loss, often resulting in much lower claim payouts.

Add scheduled personal property for high-value items

Standard policies have sub-limits on expensive items like jewelry, art, collectibles and musical instruments. If you own high-value items, schedule them separately on your policy to make sure they’re fully covered. This usually requires an appraisal but provides significantly better protection.

How much liability coverage should you carry?

Liability coverage protects your assets if you’re sued for injury or property damage. The standard minimum is $100,000, but that’s rarely enough in today’s litigious environment. Financial experts recommend carrying liability coverage equal to your net worth or at least $500,000 to $1 million. If you have significant assets, consider adding an umbrella policy for extra protection. Here’s how to determine the right amount for your situation:

• Assess your risk – If you have a pool, trampoline or dog, these increase your liability exposure.
• Consider your assets – The more you have to lose, the more liability coverage you need.
• Add an umbrella policy – If your assets exceed your homeowners liability limit, an umbrella policy provides additional protection and can dramatically increase your coverage.

Don’t let a lawsuit wipe out everything you’ve worked for. Adequate liability coverage gives you peace of mind that your family’s financial future is protected.

When to reassess your home insurance coverage

Your insurance needs aren’t static. They change as your life changes. Failing to update your coverage after major life events or home improvements can leave you underinsured. Schedule an annual policy review and reassess your coverage whenever something significant changes. Here are the key moments to revisit your policy:

• After major renovations or additions – A new kitchen, finished basement or added square footage increases rebuilding costs.
• When you buy expensive items – New furniture, electronics or jewelry may exceed your personal property limits.
• If local construction costs rise – Inflation and labor shortages can quickly outpace your dwelling coverage.
• After a major life change – Marriage, divorce or inheritance can change your assets and liability risk.
• When you pay off your mortgage – You’re no longer required to carry lender-mandated coverage, but don’t reduce your limits too far.

Not sure if your coverage is still enough? Get in touch with a VIU by HUB Advisor!

Common mistakes that lead to being underinsured

Even well-intentioned homeowners can end up with coverage gaps. Understanding the most common mistakes helps you avoid them. Here’s what to watch out for:

• Insuring based on market value instead of replacement cost – Your home’s sale price includes land, which insurance doesn’t cover.
• Skipping regular coverage reviews and updates – What was enough three years ago might leave you exposed today.
• Choosing the lowest coverage limits to save money – Cutting corners on coverage can cost you far more in the long run.
• Ignoring inflation and rising construction costs – Rebuilding costs have skyrocketed in recent years due to labor shortages and supply chain issues.
• Assuming standard coverage includes floods and earthquakes – It doesn’t, and these require separate policies.
• Not scheduling high-value personal property – Sub-limits on jewelry, art and collectibles can leave expensive items underinsured.
• Underestimating liability risk – A single lawsuit can wipe out your savings if you don’t have adequate protection.

Taking a few minutes to review your policy and address these common pitfalls can save you from financial catastrophe.

How to avoid coverage gaps without overpaying

Finding the right balance between adequate protection and affordability is possible with a strategic approach. You don’t need to overpay for coverage you don’t need, but cutting corners in the wrong places can be costly.

Here’s how to optimize your policy:

• Bundle policies for discounts – Many insurance companies offer discounts when you combine home and auto insurance.
• Increase your deductible – A higher deductible lowers your premium; just make sure you can afford it in an emergency.
• Improve home safety features – Smoke detectors, security systems and storm shutters can potentially earn discounts.
• Shop around regularly – Compare quotes from multiple insurance companies every few years.
• Work with an independent insurance advisor – VIU by HUB Advisors can help you find the right coverage at the best price.

Our advisors take the time to understand your specific situation and can identify opportunities to save money without sacrificing the protection you need.

FAQs

What happens if I’m underinsured?

If you’re underinsured and file a claim, your insurance payout may not cover the full cost to rebuild your home or replace your belongings. You’ll be responsible for paying the difference out of pocket, which can amount to tens or even hundreds of thousands of dollars. In some cases, insurance companies apply coinsurance penalties that further reduce your payout if your coverage falls below 80% of your home’s replacement cost.

How often should I review my home insurance coverage?

You should review your home insurance coverage at least once a year and anytime you experience a major life event or make significant changes to your home. Events like renovations, expensive purchases, changes in local construction costs or shifts in your financial situation can all affect how much coverage you need. Regular reviews help you avoid coverage gaps and make sure you’re not overpaying.

Is it better to have replacement cost or actual cash value coverage?

Replacement cost coverage is almost always better because it pays to replace your home or belongings with new items of similar kind and quality without factoring in depreciation. Actual cash value coverage deducts depreciation, often resulting in payouts that fall far short of what you need to rebuild or replace. While replacement cost policies cost slightly more, the added protection is worth it for most homeowners.

Do I need separate coverage for floods or earthquakes?

Yes. Standard homeowners insurance policies do not cover damage from floods or earthquakes. If you live in a high-risk area, you’ll need to purchase separate flood insurance, often through the National Flood Insurance Program, and earthquake insurance, available through private insurance companies or state programs in some areas. These policies fill critical coverage gaps that could otherwise leave you financially exposed.

Choosing the right amount of home insurance doesn’t have to be overwhelming. It just requires understanding what you own, what it would cost to rebuild and how much risk you’re willing to take on. By regularly reviewing your coverage, accounting for inflation, life changes and working with a knowledgeable insurance advisor, you can protect your home and your financial future. Don’t wait until after a disaster to discover you’re underinsured.

Ready to make sure you have the right amount of coverage? Get in touch with a VIU by HUB Advisor and find the protection that fits your needs.