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how much homeowners insurance do i need
12 Jul 2018

How Much Homeowners Insurance Do I Need?

“How much homeowners insurance do I need?”

It can be overwhelming to sort through the different types of homeowners insurance. But once you do, you still have to ask yourself if your limits are right. Do you really have enough coverage to protect yourself, your home, or your belongings if something serious happened?

That’s why we’ve put together this guide.

Keep reading to learn about the different types of homeowners insurance and how much of it you need.

How Much Dwelling Coverage Do I Need?

Your dwelling coverage is the insurance that will help you rebuild your home should it be destroyed due to a covered peril (depending on where you live, this could include things like fires, explosions, windstorms, vandalism, water damage, etc.)

In other words, you’ll want enough dwelling insurance so it’ll cover the cost of repairs should something happen to your home. And don’t forget about the cost of rebuilding attached structures, like garages, and built-in appliances, like water heaters.

When it comes to dwelling coverage, you have three different levels. Take your time when you’re looking these options over. Some policy limits aren’t high enough to completely replace your house.

Make sure you pick the policy that works for you.

Here’s a quick breakdown of the three different levels of coverage and what they include.

1. Actual Cash Value

The actual cash value, or ACV, of your home is the market value of your house. You might think that’s all the coverage you need, but any depreciation is subtracted from the overall value.

So even though the value of your property may increased since you bought it, your house has just gotten older. Because things like your roof, flooring, plumbing have aged, they have lost some of their value.

This means ACV won’t cover the entire cost to rebuild or repair your house. The value of those things went down, so though ACV will cover the value of those items, it won’t be enough to replace them with new material.

2. Replacement Cost Value

The replacement cost value, or RCV, is the cost it will take to rebuild your house with the current prices of materials and labor. This policy gives you an amount that will let you replace or repair your home without using much of your own money.

However, this policy does have higher premiums than ACV. This type of a policy is especially helpful if you have a bad credit score, and would need to take out a bad credit loan in order to bridge the gap between ACV and the cost of replacement. That extra coverage can save you a lot in potential interest.

3. Guaranteed Replacement Cost

The guaranteed replacement cost, or GRC, is similar to RCV. But with this policy, the insurance company agrees to pay a specific percentage beyond your limits in order to rebuild your home.

This is the most expensive level, but it is helpful if a disaster temporarily raises the price of materials and labor.

How Much Personal Property Coverage Do I Need?

Your personal coverage insures your possessions. If some of your items are damaged in a disaster or stolen, this policy will allow you to replace those items.

Almost all of your personal belongings are covered by personal property coverage, but if you want to insure your car, you’ll need to get a comprehensive policy.

Most companies set your personal property coverage at 75% of your total dwelling coverage. You can either raise or lower this amount, depending on what your personal belongings are worth.

To find out how much that is, you’ll need to find the value of your possessions. Estimate how much money you spend on your belongings (starting with bigger items like couches, refrigerators, TVs, etc.) and how much money you’d need to replace them.

Once you have the estimated value of your belongings, you can either raise or lower your default property coverage.

How Much Liability Coverage Do I Need?

Liability insurance covers any of your assets that are at risk. This type of homeowners insurance protects you if someone gets injured on your property and files a lawsuit against you.

If this happens, you could be held responsible for medical costs.

Think about it this way. If someone sues you for $300,000 but your liability coverage limit is only $100,000, you have to pay the other $200,000. This could also cause your personal assets to be claimed during the settlement.

This type of homeowners insurance is the least expensive, and most people recommend that you buy at least $300,000 to $500,000 worth of coverage.

How Much Additional Living Expenses Coverage Do I Need?

Additional living expenses, or ALE, cover your expenses if you’ve been displaced from your home. Imagine your home has been damaged and will need about two months to be fully repaired. Additional living expenses will cover the cost of living in a temporary home.

These expenses include things like:

  • Rent for a temporary home
  • Hotel costs
  • Moving costs
  • Food costs (but only if your temporary living situation doesn’t have a kitchen)
  • Gas costs (from driving back and forth between your temporary and real home)

Like Liability Coverage, most insurers also set ALE at a fixed percentage of your total amount of dwelling coverage. For ALE, the limit is usually 30% of your dwelling coverage. Again, you can raise or lower this limit if you need to.

How Much Homeowners Insurance Do I Need?

The amount of homeowners insurance you need directly correlates to what type of house you have, the value of your possessions, etc. For example, the age of your house and whether or not it’s up to code could affect the value of the house. And the value of the house is what you’ll use to select the right homeowners insurance policy for you.

Make sure the policy you choose actually covers your home. If you get a limit that doesn’t provide enough to completely replace your belongings or repair your house, you’ll have to pay a lot of money out of pocket.

And that can be incredibly expensive.

So if you’re asking yourself, “How much homeowners insurance do I need?”, start by finding the value of your property.

Don’t have the right type of homeowners insurance and need some extra money to help pay for repairs? Take a look at some of our small loan options.

Bonsai Finance is built to provide you with all of the information and advice you need to select the best options, whether you are looking for installment loans or online loans. Like your decision around insurance, you should make sure you have all the information you need to make a good decision on your next loan as well.