Do You Have Too Much Home Insurance — or Not Enough?

We buy homeowners insurance so that nightmare scenarios — a stove fire that ruins a kitchen, for instance, or a rampaging wildfire that burns the entire home to the ground — don’t break us financially.

But do you have enough insurance coverage to cover the cost of repairing or replacing your home when you need to make a claim? How can you know what’s the right amount?

To find your ideal full coverage, you’ll first need to know what it would cost to rebuild your home today, known as the replacement cost. That’s not the same as the market value of the home, which includes the land and doesn’t necessarily reflect building costs.

“It doesn’t matter what you can sell your home for on the market. When your home burns down, what matters is that you have enough money to hire a contractor and rebuild your home and replace all your belongings,” says Janet Ruiz, spokesperson for the Insurance Information Institute (III), an industry group.

Here’s a look at how to figure out whether you have enough homeowners insurance coverage over time.

Estimating replacement cost

Reviewing your policy annually with your insurance agent or company is a good way to start. It’s also a good time to comparison shop.

An insurer typically suggests a dollar amount of coverage based on the estimated cost to rebuild the home. That takes into account the home’s square footage, construction costs in your area and other factors, including information you shared on your policy application and updates you’ve given about any changes, remodeling and upgrades you’ve made.

Insurers use coverage calculators that, in addition to other data, multiply the local cost of new construction for a comparable home by the square-foot size of your home to estimate your insurance coverage needs, says Karen Collins, of American Property Casualty Insurance Association, a national trade organization.

It’s a homeowner’s responsibility to buy enough coverage, says Collins. If you disagree with the insurer’s suggestion, counter with your own proposal.

Forces affecting the cost to rebuild

Insurers’ estimates are only as good as their information, however, and unexpected forces can skew local construction costs. Disasters like a hurricane or flood can distort building costs when homeowners compete intensely for labor and materials to rebuild.

In California’s Napa Valley, wildfires in 2017 and 2020 drastically inflated the cost of labor and materials. An informal county survey of residential and commercial fire victims found that at least 40% were “significantly underinsured,” writes The San Francisco Chronicle. How can you ensure you’ll have the money to rebuild in a time like that?

Wondering about that question, I comparison-shopped for home insurance recently. The coverage estimates I received from two insurers seemed low, given that an influx of new residents in my region has pushed up residential construction costs far and fast.

How to do your own estimate

To estimate a home’s replacement cost, you need to multiply its square footage by the average local building cost per square foot. Your home’s area should be available from city or county records, so that part is straightforward.

As I found, however, identifying the local new-home construction cost can be difficult. The National Association of Homebuilders says it doesn’t track local per-square-foot construction costs. I called a trusted local Realtor who cited a number that, sure enough, was almost double what the insurers I’d contacted were quoting.

Collins acknowledges the issue and offers these suggestions for finding new construction costs in your area:

• Ask a local insurance agent, your home builders’ association or real estate agents.
• Attend an open house or two where the new home’s quality is comparable to yours. Divide the home’s market price by its square footage.
• “Make sure you are comparing apples to apples,” Collins says. That means including the value of any unique features that will be expensive to reproduce.

Local replacement cost per square foot isn’t the only factor in deciding on your coverage amount. The III’s Homebuyers Insurance Handbook says to also consider:

• The number of bathrooms and other rooms
• The type of materials used
• Whether the home was custom-built
• Renovations and other improvements

How to manage costs but stay well-insured

Besides choosing the right coverage amount, there are other steps to make sure your homeowners policy has adequate coverage at a manageable cost.

It may seem counter-intuitive, but avoid the temptation to downplay a home’s value to save on premiums. You may be shorting yourself — when making a claim, you may not get compensated for the true cost of replacing the home.

Likewise, keep your insurer apprised of updates and remodeling to your home that could affect the replacement value. Doing so doesn’t really add much cost to the premium, Collins says.

And, says Janet Ruiz of the III, “when you have a loss, you want to replace it with what you had.”

Here are a few more tips for managing costs:

• If your policy seems overpriced, shop around for comparable coverage at a better price.
• Raise your deductible. This requires you to pay more out-of-pocket when making a claim but it keeps premium prices lower without sacrificing the coverage you need.
• Likewise, don’t skip costly but necessary home repairs because of recent skyrocketing prices. Neglecting needed home repairs can jeopardize your insurance coverage.