Home Insurance: How Much Coverage?

When people set their home insurance dwelling limit, many use the price they paid for the house. That is the wrong number. Dwelling coverage should reflect the cost to rebuild the structure from scratch at today's prices, which is often different from market value and, after a sharp rise in construction costs, frequently higher than owners expect.

Rebuild cost, not market value

Market value includes the land, location and condition - none of which you rebuild. Rebuild cost is labour, materials, permits and debris removal for the structure itself. In expensive coastal markets, market value can far exceed rebuild cost; in some inland markets the reverse is true. Insure the rebuild.

Dwelling limit ≈ square footage × local rebuild cost per square foot

The 80 percent rule

Most policies only pay the full replacement cost if you insure the home to at least 80 percent of its replacement value. Fall below that threshold and the insurer pays actual cash value - depreciated - and may also apply a penalty to partial claims. Undersuring to save premium is one of the most common and most expensive homeowner mistakes.

Extra coverage worth discussing

• Extended replacement cost. Adds 20 to 50 percent above your limit if rebuilding costs spike after a widespread disaster.
• Ordinance or law coverage. Pays the extra cost of rebuilding to current building codes.
• Water backup. Covers sewer or sump pump backup, which is excluded from standard policies.
• Scheduled personal property. Raises limits on jewellery, art and electronics that hit per-category caps.

Review the limit after building-cost swings

Construction costs can move faster than home prices. After a period of sharp material and labour inflation, an old limit can leave a home badly underinsured. Re-check the dwelling limit every few years rather than setting it once at purchase.

Frequently asked questions

Does dwelling coverage include the land? No. Land is not destroyed by the perils insurance covers.

What is covered under other structures? Detached garages, fences and sheds, usually at 10 percent of the dwelling limit.

Estimate your dwelling needs with the calculator below.