How Much Homeowners Insurance Do I Need?

Andrew Dehan
Natalie Taylor, CFP®, BFA™
How Much Homeowners Insurance Do I Need?

Your home is a major investment. Chances are that it’s one of the largest purchases you will ever make. That means you need to protect it with homeowners insurance. But how much homeowners insurance is necessary and how do you decide? Read more to learn the details on home insurance, including what’s covered and what isn’t.

How Much Homeowners Insurance Do You Need?

The amount of homeowners insurance you need depends on how much protection you need. Coverage costs vary by location, the value of the items covered, and your claims history. If you have a valuable house without a lot of equity, or you own expensive personal items, you may want more coverage. 

Homeowners insurance companies often offer tools to help you estimate how much coverage you’ll need. Say you’ve owned your home for 20 years and want coverage for the full replacement value of the home in case of a catastrophe. Home insurance companies have tools that can estimate how much it will cost to rebuild your home with current materials and labor costs. 

For example, let’s say a tornado destroys your home and it will cost $400,000 to rebuild. If your coverage is only up to $300,000, you’ll have to cover the rest. It’s smart to regularly assess your policy, taking stock of your home as well as your personal belongings. From there, you can determine how much coverage you need, as well as the different types of coverage to acquire.

Pro Tip: Condo or apartment owners can buy specific condo insurance policies that cover the unit’s interior and associated property and risks.

What Are the Different Types of Homeowners Insurance Coverage?

Homeowners insurance can cover a variety of property types and risks. These include covering your house, your personal property, and insuring against hazards and liability. Here’s how each of these work.

Dwelling Coverage

Dwelling coverage is the bulk of your homeowners insurance policy. It protects against damage to your home and attached structures. This type of insurance should cover the replacement cost of your house. Keep in mind that that’s not necessarily what you paid when you bought it. If it’s been five or more years since the closing, your home value could have increased significantly.

Other Structures Insurance

Other structures, such as a shed or your fence, may not be covered under dwelling coverage. You may need an additional endorsement to cover them. A good rule of thumb is to make additional structure coverage up to 10% of your dwelling coverage. That means if your dwelling coverage goes up to $400,000, then you should have a $40,000 limit for other structures. However, if you don’t have other structures, or if your structures are more valuable, you may want to adjust this limit.

Personal Property Insurance

Personal property insurance is the part of your homeowners insurance policy that covers your personal belongings. It ensures that valuable items like jewelry, electronics, antiques, and musical instruments are covered in the event that something unfortunate happens. 

In general, a coverage limit of 50 - 70% of your full dwelling insurance is a good place to start. That means if you have a dwelling coverage limit of $400,000, you’d want to start with a personal property coverage limit of $200,000 - $280,000.

You can adjust that up or down depending on your needs, but don’t underestimate it. Take inventory of your belongings to determine what makes sense for you. Note that if you have especially valuable items, you may need to ask for a specific endorsement or policy to protect these pieces of personal property.

Pro Tip: If you’re looking for more affordable home insurance, some vendors offer bundled home and auto insurance policies that offer substantial discounts of up to 20% on premiums.

Liability and Medical Insurance

These two types of coverage protect you if something happens to someone on your property. Say you have a pool and someone injures themselves diving in. Liability insurance will cover you if that person decides to sue you for damages. You can use medical insurance, on the other hand, to cover a portion of that person’s medical bills.

This type of insurance are useful if you have items on your property that are more prone to harm someone. Swimming pools, trampolines, guns, and treehouses are good reasons for these types of protection. Even factors like how often you entertain or whether you have dogs are worth considering for extra coverage.

Looking for life insurance? See why we recommend term life insurance, not whole-life: Term vs Permanent Life Insurance: What’s the Difference?

What’s the Difference Between Actual Value and Replacement Cost?

There is a big distinction between actual value and replacement cost. While they can sound similar, actual value takes depreciation into account, whereas replacement cost does not. So, if you bought a laptop for $1,500 two years ago, actual value insurance will give you what that two-year-old laptop is worth now. That’s much less than what you paid for it. Replacement cost insurance will cover how much it costs to replace the item. 

There are two additional types of replacement cost coverage: guaranteed replacement and extended replacement. These are linked to your coverage limits and can also be referred to as “increased dwelling coverage.”

If your home is destroyed, guaranteed replacement covers the entire replacement cost, even if it exceeds your dwelling coverage limit. Extended replacement will cover up to a certain percentage over your coverage limit. So, if costs of materials and labor have gone up, you’d still be covered to different degrees with these coverage types.

Pro Tip: Buying homeowners insurance is an important financial goal, but so are paying down debt and writing a will. See others in our guide: 7 Short-Term Financial Goals You Can Use.

What Isn’t Covered Under Most Standard Policies?

While home insurance coverage can be extensive, there are several risks that standard policies won’t cover. Here’s a list of some of the common hazards standard home insurance excludes:

  • Floods and water damage 

  • Earthquakes

  • Sinkholes

  • Termite and insect damage

  • Bird and rodent damage

  • Damage from mold, mildew, and other rot

To gain coverage in these areas, you’ll have to add an endorsement to your current policy or find a new provider for that hazard. You can buy specific hazard insurance policies to cover the above. For flood insurance, you’ll have to use the government’s National Flood Insurance Program.

Homeowners Insurance FAQ

Homeowners insurance can be a complex topic. Here are some common questions about home insurance.

What Is the 80/20 Rule in Homeowners Insurance?

The 80/20 rule is a popular rule of thumb when creating your home insurance policy. It means you should be covered for at least 80% of your home’s replacement cost. This balances the cost of coverage against the benefit you receive from it.

What Is the Average Homeowners Insurance Cost?

In 2023, the average home insurance in the United States costs $2,777 a year for $300,000 in dwelling coverage, according to Note that costs can vary drastically by location and the value of your home. Always shop around for coverage since different firms will sometimes offer vastly different rates.

What state has the highest property insurance rates?

Oklahoma has the highest homeowners insurance costs in 2023. puts the state’s yearly average at $5,317. That translates to just over $443 a month. The reasons for such high insurance costs include frequent tornadoes, hail, wildfires, and flooding.

Pro Tip: Once you’ve handled your homeowner’s insurance, setting yourself up for retirement is easier than you think. See more in our article: Why Is Budgeting Important to Your Family?


Protecting a large financial investment like your home is an important step to take. While it may be cheaper to sign up for lower coverage, you do so at the risk to your home. What you need in coverage could vary significantly from what someone else needs in a different area. For instance, your state may be more prone to severe storms, which means you should consider higher coverage with a lower deductible.

Your homeowners insurance needs to protect your home, your personal property, and your financial future. It can save you if your house is wrecked in a storm, but it can also protect you from a lawsuit if something happens on your property. Knowing this, it’s best to take the proper precautions and shop for a homeowners insurance policy that can protect you from multiple hazards.

Andrew Dehan Personal Finance Writer
Natalie Taylor, CFP®, BFA™ Head of Financial Advice at Monarch

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