How Much Home Insurance Coverage Do You Need?

As with most types of insurance, we tend to only buy the amount of home insurance coverage that is absolutely required of us by law. For most people, we’re not thinking about how much home insurance we need when applying, we’re thinking about how much our home is going to cost us and how we can avoid adding any additional cost to it. Besides, who really thinks that a major fire or natural disaster will ever strike their home? Few if any; which is why we don’t usually think twice about having the minimum home insurance coverage. However, if you really want to protect yourself and your family, you’ll almost certainly need a better insurance plan as most minimum coverage plans only cover the cost of the mortgage. That means if your house suffers major damage or is destroyed, there may not be money to rebuild or repair it. It also means the contents inside your home probably won’t be fully replaced, if at all. So what kind of policy will you need if you want to be covered for your home and everything in it? We’ll discuss that below within the types of home insurance coverage available.

Types of Home Insurance Coverage

Actual Cash Value

An actual cash value insurance policy is almost always the least expensive type, but it also provides the least coverage. Typically the home is only insured for the face amount of the policy, which will probably not be enough to actually rebuild the home. Your possessions within the home are insured but capped at a certain amount. The main problem with this type of policy is your items are insured at their actual cash value and almost everything loses value over time. Your expensive items, television, computer, etc, will certainly be worth less than what you paid for them. So while actual cash value coverage does provide you with some reimbursement, it probably won’t fully cover rebuilding your home or replacing your damaged possessions.

Replacement Cost Coverage

The other major type of home insurance policy is replacement cost coverage, where the idea is that your insurance provides enough coverage for all of your items and your home to be replaced. Unfortunately, this won’t always be the case, as most policies will cap the amount of reimbursement you can receive. Replacement cost coverage also might not replace your items with something of equal value. In order to get true replacement cost coverage, generally considered the best coverage, you’ll likely be looking at paying a more expensive policy. These policies are generally 25% higher, but could be well worth it in the case of an accident.