How Much Dwelling Coverage Do I Need?
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Summary:
Dwelling coverage is the part of your homeowners insurance policy that covers the physical structure of your home. How much dwelling coverage you need depends on the replacement cost of your house in the event that it’s completely destroyed and needs to be rebuilt from the ground up. The cost to rebuild your home will depend on the size of the home, its interior and exterior features, and its building costs, among other factors.
It’s not fun to imagine your home getting badly damaged or even totally destroyed due to a fire, a weather-related event, or some other disaster, but it’s important to be prepared for such a scenario nonetheless. In the event of a disaster, you’ll be glad to know that your homeowners insurance company included dwelling coverage as part of your policy.
Of course, you still need to make sure that you have the right amount of dwelling coverage to reimburse you for the worst-case scenario: the total replacement cost of your home. Keep reading to learn all about dwelling coverage, including what it covers, what it doesn’t cover, and how much dwelling coverage you may need.
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What is dwelling coverage?
Dwelling coverage — also known as major structure coverage or Coverage A — is the part of your homeowners insurance policy that covers the physical structure of your home, including the following elements:
- Walls
- Floors
- Roof
- Windows
- Support beams/frame
- Foundation
- Built-in appliances and fixtures
Dwelling coverage also includes attached structures, such as porches, decks, or an attached garage. However, dwelling coverage does not extend to unattached structures, such as fences, gazebos, and sheds. Instead, these structures are typically covered by “Other Structures Coverage” insurance (also known as Coverage B), which applies to the repair or rebuilding costs of — as the name implies — other structures on your property.
“It’s important to call out that not all policies are created equal,” says Angel Conlin, chief insurance officer at Kin Insurance. “Dwelling coverage can be offered on an actual cash value or replacement cost basis, and it makes a big difference in your claims payout. Actual cash value policies are cheaper, but they only cover the depreciated value of your home. It’s often not enough coverage to actually fully rebuild after a major loss. Replacement cost policies […] pay for what it costs to rebuild your home entirely at the current market rate. After a total loss, your home can be rebuilt to its former glory.”
How does dwelling coverage work?
Like other types of insurance policies, home insurance (including dwelling coverage) is basically a contract between you and the insurance company. As long as you pay your premiums on time, you’ll be reimbursed up to the replacement value of your home (minus the deductible) in the event of a natural disaster, a fire, or other covered perils.
To gain the benefits of your dwelling coverage, you’ll first need to file a claim with your insurance company, which you should be able to do online, through the company’s mobile app, or by phone. They may ask you to take pictures of the damage and submit them with your claim, but the insurance agent will most likely send out a claims adjuster to assess the damage as well.
Once the adjuster files their report, you’ll receive a payout from the insurance company, which may come in the form of a check or a direct deposit to your bank account. Your deductible will be subtracted from your payout; this is usually a flat fee, but it may be a percentage of your dwelling coverage limit.
Pro Tip
“You should always check the deductible. Most companies offer a separate wind/hail/hurricane deductible that could be substantially higher than the standard deductible. The minimum deductible for most companies is $1000.” — Keith Hawsey, Agency Principal at Hawsey Insurance Group: A PCF Insurance Company.
How much dwelling coverage do you need?
How much dwelling coverage you need depends on how much it would cost to rebuild your particular home. As Conlin points out, you’re better off getting replacement cost coverage rather than actual cash value coverage because coverage limits are much lower when homeowners insurance policies cover only the actual cash value of a home.
“Homeowners can roughly calculate their home’s replacement cost on their own by taking their home’s square footage and multiplying it by local building costs per square foot,” says Conlin. “For example, the national average cost to build a home is $154 per square foot, so a 2,000-square-foot home may cost about $308,000 to rebuild. But that’s the national average — your local building and labor costs may be higher or lower.”
All that said, your insurance agent should be able to help you come up with the proper dwelling coverage limit you need by looking at local construction costs and other factors, including the following:
- Square footage of the home
- The exterior walls and their materials (brick, wood, siding, etc.)
- The number of rooms
- The number of bathrooms
- The type of roof and roofing materials
- Architectural style and number of stories
- Interior features like flooring, cabinetry, and fixtures
- Special features such as fireplaces, upgraded flooring, and custom cabinetry
- Built-in appliances like water heaters, stoves, and furnaces
- Any home improvements or additions you’ve made
As Conlin stresses, “A home should be insured up to its full replacement cost — that is, what it would cost to rebuild it from the ground up after a total loss. Anything less than 100% replacement cost coverage means a homeowner isn’t fully insured.”
Additional coverage to supplement dwelling coverage
To be on the safe side, particularly if you live in a high-risk area, you may want to consider additional insurance to supplement your existing dwelling coverage. It’s important to remember that building costs change over time, such as after a major disaster or during a pandemic. To avoid finding yourself underinsured, you may want to add one of the following types of coverage to your homeowners insurance policy:
- Extended replacement cost coverage: An extended replacement cost rider added to your policy increases your dwelling limit by a certain percentage — typically 25% or 50%. For example, if your current dwelling coverage limit is $200,000, an extended replacement cost of 25% would bump that limit up to $250,000. Note that adding this rider (or endorsement) will increase your premiums, so be sure to evaluate if it’s worth the extra cost.
- Guaranteed replacement cost coverage: Guaranteed replacement cost coverage is a more expensive option, but as the name suggests, it guarantees that the insurance company will cover the total rebuilding costs of your home with no limit. This is the most comprehensive dwelling coverage policy you can have, although not every insurance company will offer it.
IMPORTANT: Dwelling coverage isn’t required by law, but your mortgage lender will usually require you to carry it when you’re financing your home. Even if you don’t have a mortgage, it’s a good idea to have homeowners insurance that includes dwelling, personal property, and liability insurance. This way, in the event of a natural disaster or some other incident, you don’t have to pay for damages out of your own pocket.
Disasters covered by dwelling coverage
As a homeowner, it’s important to be aware of what types of hazards, disasters, or “covered perils” are included in your homeowners insurance policy. Most homeowners insurance companies offer HO-3 policies, says Conlin, and that’s the most common type for homeowners. Typically, covered perils incorporated in these policies include the following:
- Fire and smoke
- Explosions
- Vandalism
- Wind and hail
- Lightning
- Weight of ice or snow
- Civil disturbances, such as riots
In general, most homeowners insurance policies of this kind cover any damage that happens to your house, unless it’s specifically excluded from your policy. Of course, even the best homeowners insurance doesn’t cover every type of situation or disaster.
What’s not included in dwelling coverage
The following are some common disasters that most homeowners insurance policies won’t cover unless you purchase additional coverage:
- Flooding: Most insurers don’t automatically cover flooding, so if you live in a high-risk area, you may want to consider adding flood insurance to your homeowners insurance policy. You can also get flood insurance from the federal government.
- Wear and tear or poor maintenance: “Many homeowners, particularly first-time homeowners, don’t realize home maintenance is something they’re expected to do when they buy a homeowners insurance policy,” says Conlin. “Most home insurance policies explicitly exclude damage from “neglect” or “failure to properly maintain the property.” This means that your insurance policy doesn’t cover things that fall apart because you didn’t take care of them (“lack of maintenance”). It only covers damage from acute, unexpected events.”
- Pest infestations: An infestation of bugs, rodents, or other pests is typically not considered a covered peril under most homeowner policies.
- Earth movement: Most homeowners insurance companies don’t cover any type of “earth movement,” such as earthquakes, landslides, mudslides, or sinkholes. However, you may be able to obtain extra coverage for these types of disasters through your insurance agent.
What else does homeowners insurance cover?
Homeowners insurance policies typically include six types of insurance coverage:
- Dwelling coverage: Coverage to repair or rebuild the structure of your home
- Other structure insurance: Coverage to repair or rebuild other structures on your property, such as a shed or a guest house
- Personal property coverage: Coverage for loss or damage to your personal belongings
- Personal liability coverage: Legal and medical coverage for injuries or incidents that happen on your property
- Medical payments insurance: Coverage needed to pay for additional medical bills
- Loss of use insurance: Coverage for hotels or additional living expenses you incur if you can’t stay in your home for a period of time
Pro Tip
Each component of your homeowners insurance policy will have different coverage limits, so be sure to check with your insurance company to make sure you’re carrying enough personal property coverage and liability coverage along with your dwelling coverage.
How much does homeowners insurance cost?
According to the most recent figures from the Insurance Information Institute, the national average cost of homeowners insurance was $1,272 a year in 2019. However, it’s a difficult figure to pin down on a local scale because rates can vary dramatically depending on where you live, your policy limits, and your claims history, among other factors. The following table breaks down the average cost of homeowners insurance by state:
| State | Average Annual Cost of Homeowners Insurance |
|---|---|
| Alabama | $1,463 |
| Alaska | $962 |
| Arizona | $850 |
| Arkansas | $1,456 |
| California | $1,177 |
| Colorado | $1,618 |
| Connecticut | $1,531 |
| Delaware | $908 |
| Washington, D.C. | $1,275 |
| Florida | $1,988 |
| Georgia | $1,362 |
| Hawaii | $1,182 |
| Idaho | $799 |
| Illinois | $1,054 |
| Indiana | $983 |
| Iowa | $913 |
| Kansas | $1,519 |
| Kentucky | $1,172 |
| Louisiana | $2,037 |
| Maine | $936 |
| Maryland | $1,125 |
| Massachusetts | $1,617 |
| Michigan | $999 |
| Minnesota | $1,433 |
| Mississippi | $1,622 |
| Missouri | $1,299 |
| Montana | $1,287 |
| Nebraska | $1,564 |
| Nevada | $791 |
| New Hampshire | $1,021 |
| New Jersey | $1,237 |
| New Mexico | $1,126 |
| New York | $1,357 |
| North Carolina | $1,193 |
| North Dakota | $1,236 |
| Ohio | $853 |
| Oklahoma | $2,000 |
| Oregon | $727 |
| Pennsylvania | $955 |
| Rhode Island | $1,731 |
| South Carolina | $1,303 |
| South Dakota | $1,218 |
| Tennessee | $1,259 |
| Texas | $1,982 |
| Utah | $743 |
| Vermont | $947 |
| Virginia | $1,080 |
| Washington | $908 |
| West Virginia | $968 |
| Wisconsin | $750 |
| Wyoming | $1,244 |
In general, though, the more dwelling coverage you need, the more expensive your policy will be. Your home is a huge investment, so homeowners insurance (and dwelling coverage specifically) isn’t an expense you want to skimp on. Imagine having your house totally destroyed and not being able to afford to rebuild it!
If the cost of homeowners insurance is a concern, there are some ways you can lower your premiums. For example, choosing a higher deductible will reduce your rates. You can also bundle your homeowners insurance with other insurance policies, such as car, boat, or motorcycle insurance. Finally, it’s a good idea to shop for quotes from multiple homeowners insurance companies to find the best rates.
FAQ
How often should I reevaluate my dwelling coverage?
There are many issues that can affect the replacement value of your home — like supply chain issues, inflation, and a rise in local construction costs, just to name a few. In addition, you may have made improvements that resulted in an increase in the replacement cost of your home. For these reasons, you should plan to meet with your insurance agent regularly to make sure you are carrying enough coverage.
“I would suggest most clients should reevaluate their homeowner’s insurance for coverage and price every two to three years. This would ensure that the amount of insurance on your dwelling is sufficient and the annual premium has not increased significantly,” says Hawsey.
How much coverage do condo owners need?
Condo owners don’t need as much dwelling coverage as owners of single-family homes because they typically don’t own the building itself, only a single unit within the building. The condo association should have a master insurance policy that covers the building’s actual structure. This means you’re responsible for repairing or replacing anything inside the unit, such as floors, appliances, and fixtures.
However, association policies may vary, so you should check with your condo association to make sure you know exactly how much dwelling coverage you need. For example, the association’s policy may cover the inside of your unit as sold to you but not any upgrades you’ve made to it. Conversely, you could receive no coverage from the association and be responsible for everything within your unit.
What is the 80% rule for dwelling coverage?
“The 80% rule is a coinsurance clause on all standard policies that require the insured to carry coverage on at least 80% of the home’s total replacement value to receive full replacement for losses. If they fall below 80%, then all losses go to a percentage that is based on the insurance-to-value ratio,” explains Hawsey. “For example, if a home has a $1 million replacement value and the insured only has coverage on the dwelling for $500,000, then the company would pay up to 50% of a claim. So if the insured has a $40,000 claim to replace their roof, the insurance company would only pay up to $20,000.”
Key Takeaways
- In case of natural disasters or other hazards, you need enough dwelling insurance to pay for rebuilding costs to repair the physical structure of your home.
- Homeowners’ policies vary, so be sure to get a policy with a dwelling limit for the replacement cost value of your home rather than your home’s market value or actual cash value.
- A homeowners policy encompasses more than just dwelling coverage: it also includes liability coverage, medical payments, personal property coverage, and insurance for other structures on your property.
- How much dwelling insurance you need depends largely on the square footage of your house, but it also depends on other details of the home, including the replacement costs of built-in appliances, flooring, and fixtures.
- For extra protection, especially for homes in higher-risk areas, adding extended dwelling coverage or guaranteed replacement cost insurance to your policy will help ensure you have enough dwelling coverage to rebuild your entire house in the event of a disaster.
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