Home insurance is an important investment that protects you in the event something serious goes wrong in your home. Whether the building is damaged or destroyed by fire, valuables are lost to burglars, or you’re sued after someone slips and falls on your driveway, home insurance is there to pay for the loss.
One of the great challenges in buying home insurance is calculating how much coverage you need. Without enough coverage, you could be left with big expenses if something happens. With too much coverage, you’ll waste money paying premiums for insurance you’ll never be able to use. Here are some tips to find the “goldilocks zone” and get your home insurance coverage just right.
- Different home insurance policies have different coverage limits. You can set different coverage limits for your building dwelling, your liability protection, and your physical contents.
- For your dwelling, you'll want enough insurance to cover a home rebuild. If you're unsure about this number, you can add an endorsement that guarantees you'll be paid out accordingly.
- For liability coverage, it's recommended that you carry at least $1 million. This can come in handy if you're ever sued for property damage or bodily injury by a third party.
- To select your contents insurance limit, it's recommended that you go room to room and estimate the cost to replace your items accordingly. Keep in mind some policies will pay out the depreciated value of your belongings while others will pay out the full replacement cost.
How much insurance do I need for my building?
In insurance parlance, coverage for the building (your house itself) is called dwelling building coverage. This portion of your policy protects you financially in case something happens to your home.
Why do I need dwelling coverage?
The dwelling component of your home insurance policy covers damage to the building itself. If your house, apartment or condo is damaged or destroyed by an adverse event like fire, smoke, wind or lightning, the dwelling portion of your policy will pay to restore or rebuild your home.
Your mortgage lender will likely require you to carry adequate dwelling coverage as a condition of the loan.
Most home insurance policies include coverage for “additional living expenses,” which include the cost of hotels, rent, laundry, pet boarding and storage that result from a loss. Your policy will likely also include coverage for additional structures, like a shed or detached garage.
How much building coverage do I need?
You need enough coverage to replace your home in the event it’s destroyed completely (e.g., by fire). This is typically done with a replacement cost policy in which your insurance company will pay to build a new home of the same size and with similar features.
The replacement cost of your home isn't the same as its market value. Basing your building coverage on the amount of money your property would sell for on the current market can lead you to be overinsured or underinsured.
How do I calculate the replacement cost of my home?
One of the great stresses of buying home insurance is figuring out how to value your home’s replacement cost. Guess too low, and you could have a serious shortfall in your coverage should you ever need to rebuild. Guess too high, and you’ll waste money on expensive insurance coverage you don’t need.
Guaranteed replacement cost coverage to the rescue
To solve for this, most home insurance companies recommend guaranteed replacement cost coverage. With guaranteed replacement cost coverage, you’re assured that your insurance company will pay the full replacement cost even if it exceeds their estimate.
Getting an accurate estimate is still important, however, because guaranteed replacement cost insurance won’t pay for any upgrades. If you decide you want to rebuild bigger and better than before, you will be on the hook for any expenses over and above your policy’s coverage limit.
If you don’t trust your insurance company’s estimate, your next-best bet is to hire an appraiser who can account for the specific characteristics of your home. You can also estimate your rebuilding cost based on the average cost to build a home in your area. According to Altus Group’s 2022 Canadian Cost Guide, the cost to build a detached home ranges from $120 to $275 per square foot.
How much liability insurance should I have?
Liability insurance protects you financially in case you are held responsible for damage to someone else’s property, or another person’s injury or death.
Why do I need liability home insurance?
Just as your car insurance policy protects you if you kill or injure somebody, or cause property damage, while driving your car, your home insurance policy protects you if you do the same while owning your home.
For example, your home insurance policy would pay your legal costs and settlement if someone were to slip and fall on your icy driveway. The same would be true if your dishwasher overflowed and caused significant flood damage to the unit below yours.
How much liability coverage do I need?
When things go wrong, costs can add up quickly. It’s recommended to carry a minimum of $1 million in third-party liability coverage on your home insurance policy, but limits up to $5 million are available.
Many home insurance companies suggest that $1 million may not even be enough liability coverage and push for $2 million instead. Their argument for this is something along the lines of: “What if you get sued for $ 1.5 million? Then you’ll still owe $500,000 out of pocket. Plus the extra coverage doesn’t cost that much anyway.”
What I can’t find is many examples of this actually happening in cases that would be covered under home insurance policies. My research indicates that personal injury claims over $1 million are exceedingly rare in Canada, and the overwhelming majority are related to car crashes.
Until anyone can point me to research that shows homeowners frequently face liability claims over $1 million, I’m comfortable saying most Canadians won’t benefit from selecting a higher limit for liability.
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How much contents insurance do I need?
Contents insurance protects you financially in case something happens to the things you keep inside your home.
Why do I need contents insurance?
Your home is more than four walls and a roof; it’s where you keep all your stuff. Contents insurance pays to replace your things in case they’re damaged, destroyed, or stolen. Coverage extends to important components of your house like appliances and furniture, as well as personal belongings like electronics and clothing.
How much contents coverage do I need?
You need enough contents coverage to replace everything in your home in case it burns down. This includes all your appliances (including things like an air conditioner and furnace), furniture, electronics, clothing, jewelry and everything else you keep in your home.
Similar to your dwelling coverage, you can insure your contents for their actual cash value (the amount you could sell them for), or their replacement value. When it comes to your contents, actual cash value (ACV) coverage takes depreciation into account. For example, insurance would only pay to replace your 3-year-old laptop with another 3-year-old laptop. With replacement value coverage, your insurance company would pay to buy a new laptop.
Figuring out the amount of coverage you need for your contents can be a challenge. A rule of thumb espoused by insurance companies is that your contents coverage should equal a percentage of your dwelling coverage. The numbers suggested range from 50% to 80% of that value. By that math, if you insured your dwelling for $500,000 replacement value, you need between $250,000 and $400,000 worth of coverage for your contents.
A better way to calculate your contents insurance needs is to go room by room through your home and generously estimate the cost to replace each item, keeping in mind that you’ll likely want (or need) to buy brand-new items in the event of a claim. Note that most standard home insurance policies carry limits for certain valuables, and you may have to purchase separate coverage.
What other home insurance do I need?
In addition to coverage for your dwelling, third-party liability, and contents, you may wish to purchase additional coverage on your home insurance policy. These additions, referred to as “endorsements” or “riders,” can include coverage for:
Damage caused by flooding from bodies of water outside your home (flood damage caused by plumbing failures is typically included in a standard policy).
Damage caused by sewage backing (also referred to as sewer backup) up into your home, whether from a public sewer or private septic system.
Valuable items that exceed your standard policy’s coverage limits, like jewelry, furs and collectibles.
Your home-based small business, including its property and income replacement if you’re unable to work due to a loss
Identity theft, including financial losses and legal costs.
All of these endorsements are optional but worth considering in case something happens that your standard policy doesn’t cover.
The bottom line
It’s important to get enough home insurance coverage to ensure you’re covered in case of a catastrophe like a fire. It’s also important to calculate your coverage limits carefully to make sure you’re not paying for more insurance than you need.
Cover your bases by investing in guaranteed replacement cost coverage for your dwelling, choosing a reasonable limit for liability coverage, and taking care to estimate the actual cost of replacing all your belongings after a total loss.