How much homeowners insurance do I need? You need enough insurance to cover the following:
- The structure of your home.
- Your personal possessions.
- The cost of additional living expenses if your home is damaged and you have to live elsewhere during repairs.
- Your liability to others.
Some banks require you to buy homeowners insurance to cover the amount of your mortgage. If the limit of your insurance policy is based on your mortgage, make sure it's enough to cover the cost of rebuilding. (If your mortgage is paid off, don't cancel your homeowners insurance. Homeowners insurance protects your investment in your home.)
Standard homeowners insurance policies provide coverage for disasters such as damage due to fire, lightning, hail, explosions and theft. They do not cover floods, earthquakes or damage caused by lack of routine maintenance.
Replacement cost policies.
Most homeowners insurance covers replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality. There is no deduction for depreciation -- the decrease in value due to age, wear and tear, and other factors.
Your personal possessions
Most homeowners insurance policies provide coverage for your personal possessions for approximately 50% to 70% of the amount of insurance you have on the structure or “dwelling” of your home. The limits of the policy typically appear on the Declarations Page under Section I, Coverages, A. Dwelling of the homeowners insurance policy.
Replacement Cost or Actual Cash Value
Suppose, for example, a fire destroys a 10-year-old TV set in your living room. If you have a replacement cost homeowners insurance policy for the contents of your home, the insurance company will pay to replace the TV set with a new one. If you have an actual cash value policy, it will pay only a percentage of the cost of a new TV set because the TV has been used for 10 years and is worth a lot less than its original cost. Some replacement cost homeowners insurance policies also replace the item and deliver it to you.
Liability to others
Generally, most homeowners insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available. Increasingly, it is recommended that homeowners consider purchasing at least $300,000 to $500,000 worth of coverage of liability protection.
Umbrella or Excess Liability
Umbrella or excess liability policies provide extra coverage. They start to pay after you have used up the liability insurance in your underlying home (or auto) policy. An umbrella policy is not part of your homeowners insurance policy. You have to purchase it separately. In addition to providing a higher dollar amount, they offer broader coverage. You are covered for libel, slander, and invasion of privacy. These things are not covered under standard homeowners insurance or auto policies.
