Author: Kimberlee | September 10, 2025
Edited by: Kimberlee and Reviewed: Kimberlee
Buying homeowners insurance is a necessity for most homeowners. What you don’t want to do is get more insurance than you need. If you do, you are just overpaying for insurance because the insurance company isn’t going to give you more in a loss just because you were overinsured. Let’s examine the factors that go into how much homeowners insurance you really need for your home.
A mortgage company will require you to get homeowners insurance on your home. Some people make the mistake of insuring the dwelling at the fair market value when you want to insure it for the construction cost. An insurance company will usually figure this amount out using proprietary software, yet some people still insist on insuring it for more. This is a mistake as you won’t get a bigger house built just because you insured it for the higher value. Similarly, your personal property in the house will be insured based on a percentage of the dwelling cost. You really won’t get more stuff for having more insurance. It just becomes an excessive cost on the home.
An insurance company is interested in insuring the home properly and uses proprietary software to calculate the replacement cost of the home.
The replacement cost of the home is the amount it takes to rebuild it from the ground up. This includes clearing the site of debris and preparing for a foundation to be poured. This amount can fluctuate somewhat based on current market trends in building costs and labor. However, the insurance company factors this into the formula and will ensure rebuilding the house as long as you are 100% insured based on their calculations.
Personal property is usually a percentage of the dwelling cost. This is the default amount set by insurance companies. It is wise to do a home inventory to assess the true cost and see if you have more stuff than what the default says. Keep in mind that you can’t go below the default. If you were to have a total loss, the insurance company would cut you a check for the defaulted property damage amount so you can restart.
Home insurance usually has $100,000 in liability coverage included in the policy as a default. Talk to your insurance agent to see if you need more liability coverage. You can increase it on the policy or get an umbrella policy that adds coverage to both the home and auto insurance policies.
This is usually a set amount that you can budget for if you need to rent a place while your place is being repaired due to a covered loss. Some insurance companies will give you a timeframe, such as two years of loss of use coverage, while others fix the budget for you to stay under. You can’t increase loss of use coverage in most cases.
The insurance company will consider many factors when computing the construction cost of your home. They start with the size of the home and include its shape as well, since more cuts in lumber mean more labor costs and likely more supplies. Your ZIP Code will also affect the costs as it affects labor rates and supply costs. The type of roof you have will also affect the cost since different roof shapes and styles are priced differently. Then the insurance company will look at the grade of materials. Did you use linoleum on the floor or do you have oak planks? Are the cabinets particleboard or cherry wood? The grade of materials will affect the cost and is factored in so that you get a total price per square foot that is multiplied by the square footage for the dwelling cost.
Let’s look at some of the factors that influence your home insurance needs.
Where you live and any natural hazards affect the cost of insurance. If you live in a wildfire zone, your insurance prices will go up, and you may likely need high-risk homeowners insurance. The more likely an area is to have a natural disaster, the more the home insurance will cost. This pricing risk has nothing to do with the dwelling cost and is a factor of risk.
If you make home improvements, let your insurance company know, as this affects the rebuild cost of the home. The insurance company will note that you upgraded your kitchen or added on a playroom in the back. These upgrades increase the rebuild cost. You might not get the house rebuilt completely paid for if you don’t notify the insurance company, as you will be considered underinsured.
Most people don’t do a complete inventory of the home, as the default personal property coverage is enough. However, for high-value items, it is wise not to just do an inventory, but get appraisals, as these items (jewelry and artwork) may need to be scheduled or put on a separate policy to be fully covered.
There are different types of homeowners insurance coverage.
The basic home insurance policy will cover the dwelling, additional structures, personal property, liability, and loss of use. While some of these numbers can be upgraded, you want the dwelling to be as accurate as possible. You want to be 100% insured without being overinsured and paying more than you need to for insurance.
The home insurance policy will not cover certain events like flood, earthquake, and hurricane damage. For these coverages to be in place, you either need to pay for an endorsement or get a specialized policy just for that peril.
Talk to your insurance agent about endorsements and riders. Some things, like identity theft coverage and back up of sewer and drain, can be easily added for a low premium cost.
Using an insurance agent and the insurance company’s resources and tools is the best way to calculate your insurance needs.
You can get an estimate from a contractor of what it would cost to rebuild your home; however, this might not be the most accurate estimate there is. It might not include remediation and preparing the site for construction.
There are online tools and calculators that you can use to get an idea of the cost of rebuilding. These tools are usually free to use and help you assess your total risk.
The best resource to calculate your homeowners insurance needs is to use an agent. You want to use the insurance company’s tools to ensure they feel that you are 100% insured. This puts them on the spot to replace your home in the event of a total loss. Keep in mind that these tools are unique to each company, and your dwelling cost may vary from quote to quote with different insurance companies.
Here are some common mistakes to avoid when getting home insurance.
When you underinsure your home, you risk not having a claim fully paid. While you want to save money on the insurance, you want your home to be 100% protected.
Choosing a higher deductible can bring your insurance premiums down. This is because you are willing to pay more out of your pocket in a claim. Make sure you choose a premium that you can afford; otherwise, your claim may get stalled because you don’t have the funds to uphold your end of the bargain. You can also bundle insurance with auto insurance to save on premium.
Take the time to talk to your insurance agent about policy exclusions. You should have a clear understanding of what is and isn’t covered by your policy. Remember that perils such as floods and hurricanes are rarely covered automatically by a policy.
You can and should make adjustments to your home insurance coverage as things in your life change:
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