How Much Home Insurance Coverage Do You Really Need for Your House?

If someone tells you there's more than one answer to this question, run away quickly. Because you'll certainly be getting bad advice. The actual (and only) answer: You should purchase enough home insurance to rebuild the house completely in case it is destroyed by a covered event such as fire or wind.

That's the only way to fully protect what for most people is their largest investment. Otherwise, your coverage could fail you in a number of ways.

The wrong answers

Just so you'll know, here are some false answers some homeowners believe and why they don't make sense for a savvy policyholder:

·         The amount of the loan you took out. Many mortgage lenders nowadays require you to make a down payment of at least 20% of the cost of the home. Some people will tell you to only buy enough home insurance to cover the loan you take out when you buy. The flaw: Suppose your house burns down; do you really want to come up with that down payment again?

·         The amount of principal you owe on your house. Your lender will require at least that much coverage – maybe more if there's a prepayment penalty – to make sure it recoups its investment. But that same fire will leave the lender whole but you with nothing.

·         The market value of your home. In the first two cases, you won't have enough coverage. For this one, you might have too much. Again, say a fire destroys the home; in most cases, the land your house sits on (which is included in the market value) won't be affected.

Finding the right number

The replacement value of your home depends heavily on two factors – the square footage and local building costs. It's easy enough to determine the square footage of the house; you probably already know it.

Getting a handle on local construction costs isn't so easy. For one thing, they can change over time. In periods of high demand, construction costs can escalate. That's why one way to get an estimate of what it would take to rebuild your house is to use an online calculator.

Simply enter the size of your house (in square feet) and your ZIP code (to get local construction costs) and you'll get three estimates of the replacement value. One assumes no upgrades, such as granite countertops or hardwood floors; the second incorporates some improvements; and the third takes multiple upgrades into account.

Remember, however, all these are just estimates. The best way to nail down the actual replacement value is to consult with a licensed agent.