Here's How to Figure out the Amount of Homeowners Insurance You Should Actually Buy

Here’s some advice for new homeowners figuring out how much insurance coverage to buy: Think back to the popular childhood fable, and keep the Goldilocks Principle in mind: Not too much, not too little, but just right.

Too much – either in total amounts, or areas of coverage you don’t really need – and you could be looking at punishing premiums on an annual basis. Too little, and when disaster strikes, your costs for repairing and rebuilding could be far beyond what your policy covers.

“The biggest danger we see arise most frequently is underinsurance,” says Carmen Balber, executive director of the Los Angeles-based group Consumer Watchdog. “That is by far the biggest problem homeowners run into, when an unfortunate event occurs and they have to file a claim.”

The statistics bear her out. Around 60% of U.S. homes are underinsured, by an average of 20%, according to data firm CoreLogic.

That’s not necessarily due to cheap homeowners who are trying to skimp. It might be because they haven’t really thought about the policy since they first took it out, or because they don’t fully grasp the ins and outs of proper coverage in the first place. In fact, a whopping 52% of policy owners don’t have a complete understanding of their insurance, according to a survey by J.D. Power.

It’s hard to blame them, because home insurance is tricky business – and in this era of climate change, it’s hard to tell what kind of calamity might befall us. But if there is any positive side, it is that people are being much more thoughtful about protecting themselves.

“Catastrophes seem to be occurring on a regular basis: Hurricanes, floods, wildfires, earthquakes,” says Janet Ruiz, a spokesperson for the Insurance Information Institute. “So people are paying more attention to insurance these days. And that’s a very smart thing, because your financial stability depends on it.”

And now, of course, we have to contend with the coronavirus and its fallout. While the pandemic won't affect the basic principles of home coverage, many insurers -- Allstate, for example -- are taking economic hardship into consideration, and allowing customers to temporarily pause or reduce premiums without penalty or cancellation (although the difference will have to be made up down the line). And if you have moved your work into your home for the foreseeable future, you might want to look into what's called a home business endorsement, or raising coverage limits for the business property you're using.

Here are a few tips from the experts to put that Goldilocks Principle into action, and get the coverage amount that’s just right for you.

-Focus on replacement costs. You’re not really aiming to insure the full market value of your property, because that includes the land, and the land isn’t going anywhere. And you should probably look to insure more than just the actual cash value of the structure, because – thanks to factors like inflation and depreciation and rising construction costs -- that may not turn out to be enough to rebuild after a disaster.

The elegant solution: Insure the replacement cost, or the rough estimate of how much it would take in labor and materials to repair and rebuild. Premiums might be 10-15% more than if you were just insuring the cash value, but it will be well worth it if you ever to have file a claim. Even better, advises Balber: Get “extended replacement cost” coverage, which covers you even if local building costs skyrocket in the wake of disaster (which often happens).

-Know your coverage areas. Standard homeowner policies cover some areas of damage, but not others. In this era of climate change and rising tides, research what your area is prone to, whether you are covered for it – and if not, to look into additional riders with your existing company, or securing that coverage through a separate insurer.

Flooding, for instance, is generally not covered. The National Flood Insurance Program (FloodSmart.gov) can hook you up with participating local brokers. The program covers dwellings up to $250,000, and contents up to $100,000, with an average annual premium of around $700, although coverage in lower-risk areas won’t cost as much.

Other areas that are typically not covered, but could be: Things like sewer backup, and personal collectibles like jewelry and artwork.

-Liability coverage is critical. You may think of home insurance as just relating to the structure, but really it’s much more than that. If someone falls and injures themselves seriously on your property, they could theoretically sue for some, or even all, of your assets.

That’s where liability coverage is your best friend. Typical homeowner policies offer at least $100,000, but you can certainly go higher and take out $300,000 or even $500,000. If you have more assets to protect, get a so-called “umbrella” policy over and above that amount. A million bucks of coverage costs a few hundred bucks a year, and is well worth the peace of mind.

-Circumstances change over time. Let’s say that your home insurance amount was perfect for when you first took out the policy. That doesn’t mean it is still appropriate today.

Perhaps in the meantime, you undertook various home-improvement projects, like bathroom and kitchen remodels, that boosted total replacement costs. So your home is now worth $400,000, but your coverage is only for $300,000 – and that’s a problem.

Or maybe your town has become a popular location, homebuilders are in high demand, and their costs have gone up. Make sure your coverage takes that into account. (Multiply square footage by current local per-square-foot building costs, which the local builders’ or realtors’ association should be able to tell you.) In a similar way, locking in an “inflation guard” rider can help protect you for increased building costs 10 or 20 years down the road.

-Cover the contents. It’s not just four walls and a roof that make a home valuable, it’s what’s inside. Generally speaking, contents can be insured up to a percentage of the structure’s overall value – roughly between 50-75%, says Ruiz.

It’s important to document those contents, though, so that there isn’t haggling with your insurance company when you have to file a claim. So perform a video inventory – there are plenty of apps to help these days, like Sortly and Nest Egg – and then upload the results off-site.

-Keep costs under control. It’s easy to instruct you to get as much insurance coverage as you possibly can. But that can be pricey, so take thoughtful steps to keep those premiums under control. Bundling homeowner policies with other areas of coverage, like your auto, could save 30%. Raising your deductible – to $1,000 from $500, say – could save you 25%. Avoid filing multiple minor claims if you don’t have to, which could make insurers nervous and lead them to not renew your policy.

If your rates are being hiked, check whether better or more affordable coverage could be had with another insurer. Insure.com is one useful site for that, says Ruiz. Independent brokers – those not beholden to a single company – are often savvy shoppers (https://www.independentagent.com/). And state insurance departments often have rate-comparison tools of their own.

Most important, don’t just let your policy gather dust in a drawer for years, but actively review whether you have the coverage amounts you need. “When renewals come in the mail every year, take some time, look it over, and call your agent,” says Ruiz. “It’s worth every second of your time.”

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