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How Much Homeowners Insurance Should You Carry?

Author: Ethan Harris

Annual homeowners insurance premiums run between $300 and $1,000, on average, according to the Federal Reserve Bureau. For a more detailed look at the coverage provided for each premium dollar, it's best to break that coverage down into its component parts.

For more on this see: The Beginner's Guide to Homeowners Insurance.

6 Types Of Coverage

A typical homeowners policy, designed to pay for damages or losses resulting from fire, lightning, tornadoes, hail, explosions and theft, provides six different types of coverage.

1. Your House This is for your actual home, including an attached garage, if you have one. The value of the land your house sits on is not included since land remains intact even when a building is destroyed.

Coverage should be for full replacement, which does not consider depreciation, current market value or inflation. Replacement coverage, as the name implies, includes the full cost of rebuilding or repairing your house.

For a ballpark estimate of your insurance needs, take the total square footage of your home and multiply that number by local building costs per square foot. A call to a local real estate agent, builders association or insurance agent should provide you with estimates of construction costs for your area.

Alternatively, you can use this helpful calculator from Building-Cost.net, which allows you to plug in more detail, such as style of house, construction materials, number of rooms and so forth.

2. Other Buildings – Freestanding garages, sheds or other structures on the property must be covered separately using the same guidelines as for the main house.

Replacing a freestanding garage or shed is less expensive than replacing a house. Depending on design and construction, however, replacement can still represent a significant cost.

3. Your Belongings – Personal belongings include furniture, appliances, clothing, jewelry – virtually everything inside the house that is not part of the structure itself.

Personal belongings constitute the second largest cost factor when it comes to insurance coverage. On average, coverage should be anywhere from 50% to 75% of the cost of replacing the main house.

You should have a complete written or video inventory of personal belongings. In some cases, especially if you have expensive jewelry or professional equipment, you may need additional insurance on personal belongings.

4. Additional Living Expenses – Coverage for lodging associated with living away from home in the event your house becomes uninhabitable can be important. This part of insurance coverage, known as additional living expenses (ALE) also includes the cost of meals and other living expenses while your home is being repaired or rebuilt.

ALE coverage varies by community and insurer. Many policies provide for an amount equal to 20% of the total amount of insurance coverage on your home.

5. Liability – Liability coverage protects you from lawsuits filed by others. It may also cover damage or injuries caused by pets.

The minimum provided by most policies is around $100,000. Many policies provide up to $300,000, although liability coverage of $500,000 or even more is not unheard of in today's litigious world. (For even more coverage, especially if you have considerable assets, consider an additional umbrella insurance policy. See How Umbrella Insurance Works.)

6. Medical – This coverage pays for medical bills when someone is injured on your property. It does not pay for your own (or your family's) medical expenses.

One type of incident not covered is an intentional act, such as a fight. If you or a family member injures someone on purpose, your medical coverage will not kick in.

Typical medical coverage ranges between $1,000 and $5,000 per person per incident.

Flood and Earthquake Insurance

These types of insurance are separate from the regular coverage provided by homeowners insurance. Each must be obtained independently, especially if either is a risk in the area where you live.

The cost of flood insurance and the coverage that is available depend on risk. For more information, check out the National Flood Insurance Program (NFIP) website.

Earthquake insurance coverage, which most insurers offer, depends on risk as well. Residents of California can also obtain earthquake insurance from the California Earthquake Authority (CEA).

The Deductible

No matter the amount of coverage you obtain, it will be subject to a deductible amount. Simply put, you will pay this amount every time you file a claim before your insurance kicks in. In general, you should get the highest deductible you can afford since that lowers the overall cost of the insurance.

Homeowners insurance is not designed to pay for every broken window or dented section of gutter or downspout. It should be used to pay for major losses or damage, and you should have sufficient cash reserves to cover the occasional mishap or accident.

For more, see: Insurance Tips for Homeowners.

The Bottom Line

Starting with the calculated replacement cost for your home, add coverage for the other listed factors and you will end up with a total estimated amount of coverage that you need.

Once you have that figure, consult with several trusted insurers to get the best price for your insurance dollar. In addition to the rate you pay for insurance, it's important to find a knowledgeable agent who can help make sure you have no gaps in coverage.

Check credentials, ask friends and family for referrals and, in the end, this due diligence will give you the peace of mind you deserve as you end your search for homeowners insurance.

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