Knowing How Much Home Insurance You Need Based on Your Home’s Value

Home insurance is crucial for every homeowner, but not every home insurance policy is the same. Your insurance needs may be different than your neighbors’ for a variety of reasons—one of which is the value of your home. 

It may seem obvious that homes with a higher value generally need more home insurance, but it is a bit more complicated than that, especially when you bring in the 80% rule. 

What is the 80% Rule in Home Insurance? 
Home insurance policies operate based on an 80% rule. This rule states that you must carry at least 80% of your home’s total replacement cost value in home insurance. If you carry less than this amount, you could have gaps in your coverage when it comes time to file a claim and receive compensation. 

For example, say you purchase 60% of your home’s total replacement cost value in insurance. At first glance, a storm causes damage that should be covered. Unfortunately, this may not be the case. Instead of the 60% of insurance you carry covering the incident, compensation will be subtracted by the amount of insurance you should have been carrying. Say the total replacement cost value of your home is $400,000. You purchase 60% in home insurance, which is $240,000. An accident occurs that costs $50,000 in damage. It may seem like your insurance should cover the damages since $240,000 is significantly higher than $50,000. 

Instead, compensation will be based on how much insurance you should have purchased. With a replacement cost value of $400,000, you should have carried $320,000. The amount of insurance you have ($240,000) will be divided by the amount you should have carried ($320,000) and that percentage will be covered only. In this case, 75% would be covered, meaning $37,500 of the damages will be covered. This unfortunately leaves you to pay the remaining $2,500 out of pocket. 

Calculating Your Home’s Total Replacement Cost Value 
The total replacement cost value of your home is not the same as its market value. Instead, it is how much it would cost to completely rebuild your home after a disaster including building and material costs. You can have this value professionally appraised or use an online resource. You should consider the home’s value per square foot along with permanent fixtures and amenities. Also keep in mind that your home’s replacement value can change if you make changes or upgrades, meaning your home insurance policy should be adjusted to fit.