The Ideal Amount Of Home Insurance To Protect Your Property

Old San Francisco Victorian - The Ideal Amount Of Home Insurance To Protect Your Property

Every year I review my home insurance policy to make sure I've got the proper coverage. The reason why it's important to check is because home insurance policies and pricing change all the time.

For example, there might be discounts or special offerings for one. Meanwhile, your insurance company might slip in some extra charges without you even knowing. Finally, and perhaps most importantly, building costs are always rising thanks to inflation.

One of the worst things that can happen after a mishap is your home insurance policy covering much less than the true replacement cost. Even if your home appreciates by only 2% a year, if you don't update your home insurance policy for 16 years, your policy will only cover half the rebuild cost!

Let me share with you one of my rental property insurance mishaps and things you should think about when figuring out how much home insurance to get.

Make Sure You Have The Right Amount Of Home Insurance

About three years ago, one of my rental's master bathroom floors started leaking water into the unit below. It was such a mess that for a couple months you could literally see through my bathroom floor into my neighbor's bathroom. I had been meaning to remodel my 30 year old bathroom for a long time, so I never thought about getting landlord insurance.

I figured I'd just rip everything out on my own dime once the tenant moved out. Of course, the bathroom disaster happened just two months before my tenants departure! I was making a healthy income back then, which allowed me to cover any and all damages without a problem. Having money made me careless with my assets.

Redoing the bathroom and fixing the damages caused by the leak cost me around $8,000 bucks. I went the “good enough route” with mid-end Home Depot material given it was a rental.

If I was smart, I would have had insurance to cover everything but a $1,000 deductible and get a sweet $25,000 bathroom instead. Only after spending $8,000 did I do my research on home insurance and get a policy. What a double whammy to my bank account.

You can get competitive free home insurance quotes from PolicyGenius. They are the best and most reliable home insurance marketplace today.

Related: What’s In A Home Insurance Policy: Know The Details Before Your House Burns Down

How To Determine How Much Home Insurance To Get

The below are all the factors that will help you determine how much home insurance to get. Home insurance isn't expensive overall. But it is necessary to protect one of your largest assets.

* Monthly cash flow. The more home insurance coverage you get, the higher your monthly premium. I personally would not pay more than 2% of the total monthly cost to insure your property. For example, let's say it costs $2,000 a month to own your home, including property taxes, HOA dues, etc. I've got a rough gauge to spend roughly $40 a month, or $480 a year in home insurance.

* Market value. It's important to get coverage as close to market value, plus a couple percent buffer just to be safe. You can find comparables by checking out the latest sales on Zillow. Once you punch in your address you'll see home estimates, previous sales prices, and comparable listings to make sure the appraised value given by your insurer is in the ball park.

* Differentiate between building and land value. A lot of people mistakenly think it's best to get insurance on the total value of the property. The main focus for home insurance is replacement cost of a similar quality home.

For example, let's say a comparable house sells for $500,000 down the street. The house is 1,500 square feet and sits on 10,000 square feet of land in Oregon. It costs an estimated $200 a square foot to rebuild the house, equating to $300,000. The land value is therefore around $200,000.

The home insurance coverage should be based on building $300,000 worth of home. If a flood wipes out your house, your land should still be there so it costs next to nothing to replace.

* Estimate the various deductibles. Insurance companies will offer various deductible levels in case a claim is made. For example, you can have a deductible as a percentage of the rebuild cost of your home, a $1,000 deductible, $2,000 deductible, $5,000 deductible and so forth.

If your home is in a hazard zone that contains Brazilian cherry wood floors, a top of the line range, gold fixtures, and custom windows that cost a fortune to replace, you might want to get a lower deductible. You don't want to feel like you are wasting money on home insurance. But, you want to be able to sleep well at night.

* Consider disaster insurance. Disaster insurance is an extra layer of insurance for those properties in hazard zones such as earthquake, fire, flooding, and landslides. If you are in a high risk zone, please read this post I wrote on how to decide whether you should or should not get disaster insurance for your property. Given I live near a fault line, I think about this topic every time I call my insurance company to check up on the latest.

* You can always change your deductible. Let's say six months down the road you feel you are paying too high a monthly home insurance premium. Don't let that feeling fester. Call up your insurance agent and raise the deductible to lower your monthly premium. If you go with a reputable insurance company like PolicyGenius, you shouldn't have any problems. Don't be afraid of being locked in.

* Understand what the condo association will and will not cover. If you are a condo owner, the master association insurance policy generally covers all damage to the building other than to your property. Your home insurance coverage is generally referred to as “walls-in” or “studs-in” coverage. You shouldn't be liable for any damage outside your walls. And your association isn't going to pay for anything that happens inside your walls.

There is a lot of contention here because what if a main pipe that is between your wall and an outside hallway wall bursts and ruins the structure? It's important to simply ask your HOA board members and the respective insurance companies what is and is not covered.

* Loss of rent and tenant liability coverage. A comprehensive rental insurance policy should have loss of rent coverage for a certain amount of months, as well as tenant liability coverage. It may take six months to fix your place and find a suitable tenant again. Your agreed upon policy will keep the cash flow coming in.

You also never know what your tenants are up to. If they accidentally set your place on fire, which ends up damaging the upstairs unit, you need to have enough insurance to cover such freak incidences. You can search for rental insurance quotes for free here.

Shop Around For Home Insurance To Get The Best Rates

The internet makes it easy for consumers to shop around for home insurance. I've had a good experience with PolicyGenius, a reliable and free home insurance marketplace. Simply search for an agent by zip code, name or city and get free quotes. They consistently have some of the cheapest rates with the most comprehensive policies.

Reputable insurance companies tend not to rip you off as much. At the end of the day, you need to get enough home insurance coverage so you can sleep better at night.

If you only want to cover 70% of your rebuild cost because you want to save on premiums and have the other 30% in liquid cash to rebuild on your own, then go for it. If having anything less than 110% of the rebuild cost gives you nightmares, then go for that policy as well. I just wouldn't get too little coverage, or get coverage that provides more than 125% of replacement cost.

USAA is OK, but I had a really wonky experience with them in the past where they raised my premiums by a whopping 45% one year! I had to fight them to stop being ridiculous and eventually got them down to a more reasonable 15% increase instead. Do what we all do when buying anything online. When you're shopping for home insurance, get actual quotes and see if your existing provider can match or beat your first offer.

Make sure your property is not only covered, but optimally covered where you aren't overinsured or underinsured. Property is already an illiquid asset that cannot be easily monetized in case of an emergency. The last thing you want to do is lose your job and have an unfortunate mishap in your home without having any money left over.

Related: Insurance For Natural Disasters: Floods, Fires, Hurricanes, Earthquakes Oh My

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40 thoughts on “The Ideal Amount Of Home Insurance To Protect Your Property”

  1. Rachael Harper

    This will help the homeowners to decide on what home insurance policy they need. Getting home insurance means you’re guarding your home.

  2. Jenna Hunter

    Thanks for explaining how to decide what amount of coverage you need. I agree that you want to consider how much you need in a deductible before you choose them. My husband and I are looking for home insurance, so we’ll have to check our deductible first.

  3. Faylinn Byrne

    Wow, I had no idea that you can call your insurance agent and change what your plan is for a deductible to lower or raise your monthly premium. My husband and I are finally in a financial position where we can start looking for a home to buy, and we have been thinking about what kind of insurance we should get. Hopefully, we will be able to keep these tips in mind and refer back to this article if we have any questions once the search starts.

  4. This is some really good information about homeowner insurance. It is good to know that it would be smart for me to shop around for homeowners’ insurance. It is good to know that it would be smart to get a professional to help with picking out some insurance. Especially since I have never picked it out.

  5. Very interesting article to read! Especially, the factors determining home insurance needs are outlined nicely. In such case, it is inevitable for individuals to conduct a systematic product research in the insurance market before freezing on any policy. One should contact a trusted home insurance advisor. This is required in order to protect dependent family members in case of any unfortunate event like demise of the sole earning member in family. – Via

  6. I have always insisted on carrying full replacement value coverage on my homes. I have also had all of my insurance policies with State Farm and have never been able to find another company that could compete on price.

  7. Great article. I noticed my homeowners insurance kept going up every year and we never made a claim. While I expect it to go due to inflation, we too saw a huge jump and decided to shop it. We built the home ourselves 9 years ago and knew what it cost to build. We spent $300k to build plus $140 for the lot. We wanted coverage of $550k to rebuild plus $250k in replacement cost. We felt that more than covered us. We received a quote from Travelers Insurance and felt it was reasonable. We paid the premium. They came out to review the home to make sure the coverage was acceptable. Once they came through the house and inspected, they wanted another $400 in premiums stating to rebuild would cost $800k. I received 3 quotes from 3 builders in the area to rebuild and even at the top price per square foot, we weren’t even close to the $800k they claimed it cost to rebuild. We canceled and went with another insurance company. It was a nightmare trying to get the money back from them. Thanks for the great advice.

  8. Thank you for posting this article. It has been quite a long time since I have even thought about my home owners insurance and it might be time to make sure I am getting the best deal possible. I might just carry that over to my car insurance as well.

  9. I had a good experience with Liberty Mutual. Therefore I will stick with them (they are a bit more than some of the other guys). That said… recently I was obligated to drop them as my Auto insurance provided. They were 2.5x the cost of Progressive and 2x the cost of State Farm. Not sure why…

  10. Kim@Eyesonthedollar

    I just switched all of my policies to a new company (auto, home, umbrella) which saved almost $700 a year. I always check every year, but this was the first time in a while that I was able to get substantial savings for the same coverage. Being new to the whole landlord thing, I’m actually not sure if we have loss of rent coverage. I would have never thought to ask for it if it isn’t included. I’ll have to check for sure. Thanks for enlightening me.

  11. We just had flooding here in Houston over the weekend. Fortunately it did not come into our house (and we carry flood insurance just in case, though we aren’t in a flood zone). However, our shower started bubbling up with water! About an inch came into it…so I am going to check with my insurance company and see if they would cover plumbing expenses given the flooding we had outside. Honestly, I’m not sure why or what actually happened. For now, we’re using the upstairs shower!

  12. I happened to check insurance rate this year because there was an increase in my escrow and my mortgage payment went up. I did lots of research…how could mortgage go up, excrow be lacking yet property values (county assessment) had decreased yet again. The answer was twofold: there was a significant increase in insurance rates in the state of Virginia (who knew), and I was insuring my 3 acres as well as my 1000 sq. foot house and studio–another 200 square feet. I brought the bill down nearly 35% and still carry plenty of insurance on my cottage. You are spot on as usual.

  13. Sam, if I own my house and rent out a spare bedroom to a tenant do you still think I need “tenant liability coverage”. Would my home insurance not cover any damages to the property including any liabilities? The house is in the SF Bay Area, CA if that is relevant

  14. When a disaster occurs with a tenant, the first thing they do is stop paying rent. Loss of rent is important and you need coverage for it. You also have liability for any damage to other units. This what insurance is for to protect you from unforeseen problems. If it was the tenant’s fault you can possibly recover some of your costs from the tenant. Sometimes it is hard to prove, better to have your own insurance!

    1. Wise words! Thank goodness my tenant continued to pay even though it took one month to fix the bathroom as we have a good relationship and they might have been worries about the security deposit, which was not a problem.

  15. When I use to own a residence it was absolutely should have had insurance but I didn’t. As I look more and more into real estate investing I keep finding out tidbits of information that can prevent a disaster. Definitely a gold nugget of information here Sam.

  16. Thank you so much for this! I am moving from renting to owning and I’ve always had renters insurance but was a bit confused on home owners insurance. Still got a bit of research to do but this was a great help!


  17. I don’t own a house yet, but I definitely need to bookmark this one for the future. When my parents got flooded in Hurricane Katrina, I realized how important it was to price the insurance correctly, although in their case, there were a lot of other factors going into it, like losses that were totally uninsured (furniture, art, etc.)

  18. Giddings Plaza FI

    I would love to hear opinions about 1. flood ins and 2. earthquake ins. Both of those are expensive “extras” in my area (Seattle). I currently don’t have them, but am reconsidering.

  19. The First Million is the Hardest

    Shopping around for insurance is something I always neglect to do. It’s been 3 or 4 years since I’ve shopped around for car insurance & maybe 2 years for my house. I guess I should get on that…

    Do you find the best time to search is when your policy is up for renewal, or just whenever you can find a better deal?

    1. I call my insurance company at least once a year to check the latest rates and coverage and then take a quick search on the internet to compare. It’s just like checking one’s stock portfolio, life insurance coverage, etc.

  20. I can’t believe USAA was raising your cost by 45%. Thank goodness you caught that and got it reduced. What a bummer on the 8k water leak. It’s crazy how much damage water can do especially since we can’t live without it. Conpanies are always trying to sneak changes into their terms and charges. So yes gotta watch them like a hawk and know what you do and don’t have each year.

  21. Regarding homeowners insurance. I recently inquired at USAA to see if my insurance would go down. Surprisingly enough, they would have gone up. The woman I was on the phone was surprised, and she said that’s the only reason that she can think of that their rates would be higher than what I was currently paying.
    I think I’m a little unique in this situation though because of the time I’ve been with the same insurance company (Allstate in our case), for over 15 years for vehicles and over 12 years for homeowners (prior to homeowners we had renter’s insurance with them).

    As for being a renter, I’d suggest you check into renter’s insurance since NONE of your possessions are covered in the event of a fire/water/etc. damage. The Landlord’s insurance only covers the building, not it’s contents … typically anyway.
    The $100/year or so that this coverage typically costs may be well worth it if you have anything of value (i.e. jewelry, computer equipment, other electronic equipment, furniture, etc.). I never used mine in the 10 years that I was a renter, but peace of mind for that amount was well worth it.

    1. USAA got me good…… almost made me pay 60% more, and I negotiated down to +15% or so. AllState is good.

      It’s really the building costs that keep on going up, hence coverage costs continues to go up.

  22. We shop our insurance and do everything we can to keep it low, but in coastal areas, we pay more for the risk we bear due to storms. I get that is the price that I pay to live in paradise, though.

    What I don’t get is why you would compare what you paid on the home to what you’re paying in insurance. (As Buffet says, there’s a big difference between Price and Value.) We bought the house for significantly under market value and rebuild value (though we insure for rebuild). So that skews our numbers by that comparison.

    For example, we pay about $14K in mortgage payments each year (this includes taxes & insurance escrowed) – almost $2.7K of that is insurance. That’s about 20% of the total mortgage & escrow costs. Far over what you would consider your 2% maximum, and we even have part of our property self insured. If we didn’t self insure outside of our roofline, our insurance premiums would be another $2K higher per year.

    1. There’s only one paradise in America, and that’s Hawaii!

      $2,700 is a lot a year for insurance….. you sure about that? What percentage is that of your property value? I’ve got to imagine you can get that premium down as that’s 10X what I’m paying as a percent.

  23. Make sure you look into renter’s insurance. When I was renting an apartment when I first moved to SF, there was a huge rain storm which resulted in a ceiling leak that dripped all night. Of all the places I could place my laptop, it was right under that darn leak! Damn, I totally forgot about this incident until now.

    Thanks a lot!

    1. Some landlords (including me) require the renter to carry renter’s insurance. It’s good to have it.

  24. I’ve bookmarked this-I’m interested in getting into rentals in a few years. I can relate to the water issue-a cousin had something similar happen before they left for a trip and came back to a disaster!

  25. This is all really great advice. The part about separating land from building value is not something I’ve actually read before, but it’s a great point. I also very much agree with your point that there’s no one right percentage to insure. How much you have in savings matters, but also what helps you sleep at night. One thing with shopping around that I have found a great solution for is the trade-off between price and service. I’ve stuck with Amica because I’ve always gotten great service from them when I need it, even though there are cheaper options out there. I just don’t know what I’m going to get from them when the sh** hits the fan.

    1. Differentiating between land value and building value is key. It’s hard to learn about service until something bad has happened. So far, nothing much has happened. I do like the phone service from USAA though.

  26. Honestly, we shop all of our insurance for our house/car/etc. every year. We always include our landlord insurance in that shop. However, I’m not sure that we have shopped it on its own. I’m pretty sure that our insurance company only offers one type of landlord insurance, but you’ve motivated me to check. Luckily, we’ve never had to use it, but we may have to take a look at what we can get from other companies as well.

  27. Jenny @ Frugal Guru Guide

    I assume you owned the rental outright. Homeowner’s and landlord insurance is something I’d never skim on!

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