How Much Insurance Do I Need for My House?

Home insurance can sometimes be an afterthought, especially for a first-time buyer who has just found the home of his or her dreams. Most of those buyers might not even think about the need for insurance – until their mortgage lender demands insurance before closing on the loan.

That can lead to hurried decisions – sometimes just blindly accepting a home insurance provider suggested by a real estate agent or loan officer. A better approach is to take the time to get quotes from several carriers – making sure you're asking each to give you a price for the similar policies.

In other words, each quote should be for the same amount of coverage and have the same deductible – the amount you agree to pay out of pocket toward a claim. Otherwise, you won't be comparing apples to apples.

Dwelling coverage and why it matters

Standard home insurance typically includes the following coverages:

• Protection for the structure of your home, called dwelling coverage.
• Protection for other structures on your property.
• Coverage for your personal possessions.
• Help with additional living expenses in case the house uninhabitable due to damage from a covered peril such as fire or wind.

Standard policies also usually include liability protection in case you're responsible for someone getting hurt on your property or suffering property damage.

By far the largest portion of your insurance premium, the amount you pay for your policy, goes toward the dwelling coverage. Except for the liability coverage, all other protections in your home insurance policy have coverage limits based on percentages of how much dwelling coverage you purchase.

For example, the other structures coverage in your policy generally is set at 10% of your dwelling coverage. If you have $200,000 in dwelling coverage, you also have $20,000 in other structures coverage for sheds, detached garages and fences.

So how much dwelling coverage do you need?

Here's the best answer for this question: You need enough dwelling coverage to rebuild the house from the ground up should it be destroyed by a covered peril.

Is that the same as the purchase price? No. The purchase price includes the land (which you'll still own) and is affected by such factors as proximity to good schools and entertainment venues – maybe even a spectacular view. Get a more in-depth explanation from this video.

To figure out the cost to rebuild your house, you'll need to know your square footage and local building costs per square foot, as well as any upgrades to the home such as granite countertops and hardwood floors. If you don't have access to those numbers, particularly the local building costs, you can use an online calculator to arrive at an estimate of the amount of dwelling coverage you need.

Once you know that, much of the rest of your policy will fall into place. You'll make your lender happy and move one step closer to taking the keys to that house you fell in love with in the first place.

HomeownersInsurance.com is an online resource for homeowners and drivers across the country. Offering comparative automobile and home insurance rates, consumers rely on HomeownersInsurance.com for the most competitive rates from the top-rated insurance carriers in the country. Square One, the HomeownersInsurance.com blog, provides fresh tips and advice on a range of financial topics to help homeowners and homebuyers make educated decisions about their insurance purchases.