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How To Pick Your Homeowners Insurance Coverage Limits

When purchasing or renewing a homeowners policy, it's important to select the right coverage limit. This is the maximum amount the insurance company will pay for a particular claim.

There are many factors to consider when choosing an appropriate coverage limit. These include the coverage options available, how much risk you’re willing to assume, and any unique characteristics of your home or its contents that may require additional insurance.

The more you know about available policy options, the better equipped you’ll be to select the right coverage limit for your individual situation. You don't want to find out after a loss that you were not covered how you'd hoped and expected.

What do homeowners policies typically cover?

Although you’ll want to confirm the specifics with your Rathbun Insurance Agent, a standard homeowners policy covers:

  • Damage or destruction to the inside or outside of your home
  • Damaged, destroyed or stolen possessions
  • Personal liability if someone is injured on your property

Depending on your insurance carrier, your home’s contents are usually covered at 50% to 70% of the home’s structural value. That means for every $100,000 your home is worth, you would be provided $50,000 to $70,000 of additional coverage for its contents. Covered contents include clothing and accessories, electronics, furniture, fixtures and appliances. 

Homeowners policies also have “off-premises” protection for possessions you have with you when you are traveling or are not at home. However, that coverage is typically much lower than on-premises protection.

With regard to personal liability, homeowners policies will reimburse you for medical expenses, lost wages or lawsuits that arise when someone is injured on your property. This even includes damage or injuries your pets cause to others. 

How much risk are you comfortable accepting?

When choosing a coverage limit, you must recognize that higher limits also mean higher premiums. Options include:

Actual cash value — You will be paid for how much the item is worth now, which is the original cost minus depreciation. This is usually much less than you would need to purchase the same item brand-new. For example, you may recoup only a few hundred dollars for a decades-old furnace when filing a claim.

Replacement cost — You will receive enough payment to rebuild your home or replace damaged property without any depreciation factored in. The goal is to provide an equivalent replacement without any additional expenditure to you. That same decades-old furnace will be replaced with a new model with similar features. Any desired upgrade in features would be at your own expense. Also, if you have an older home, it is important to note that different building methods may be substituted, such as when plaster walls are replaced with drywall.

Extended replacement cost/value — This elevated level of protection offers a buffer against inflation and allows for replacement costs even higher than your selected coverage limits. However, there is a ceiling to this higher amount, usually 20% to 25% above replacement values. This option provides greater security because it accounts for market fluctuations. For instance, a competitive real estate market or elevated construction costs in your area may mean the cost of rebuilding or repairing your home is more than its estimated replacement value. This option provides the cushion you need to replace your lost possessions to the same level of quality, regardless of market conditions.

Beware of exceptions

Don’t assume every loss scenario is included with your base policy. Here are a few of the more common exclusions:

Other buildings on your property — Many insurance companies include coverage for other structures on your property but it's usually capped at 10% of your homeowners policy limits. Other insurance companies require separate but similar coverage for any freestanding structures, such as garages or outbuildings.

Sewer and drain backups — These dreaded events are not included on standard homeowners policies because they are not considered “sudden events,” but rather ones that build up over time. Added coverage for sewer and drain backups is particularly valuable for homes in neighborhoods with older infrastructures.

Loss of living space — If you can't safely live in your home after it has been damaged or destroyed, specialized coverage known as "additional living expenses" can reimburse you for the cost of a hotel or rental home, meals and incidentals during construction. It can also cover any money you would have collected from a tenant renting another part of your home. 

Changes in building codes — Even if your homeowners policy includes replacement or extended replacement costs, any upgrades required by new building codes are not automatically covered. If your existing home is not up to code, consider adding an endorsement known as “ordinance or law." This will protect you against added construction expenses necessary to meet new code requirements.

Catastrophic events — Not all natural disasters are incorporated into general homeowners policies, nor are acts of war or terrorism. Losses due to disasters such as fires, lightning or vandalism are usually included, while floods and earthquakes are not. Be aware that the same natural disaster may have specific coverage restrictions as well. For example, wind damage from a hurricane is included, but flooding due to the same hurricane is not. If you are in an area prone to a particular type of disaster, consider additional policy riders.

Variations in occupancy — If you use your home as an Airbnb or a rental property, you need specialized coverage. Traditional homeowners insurance does not cover short-term rentals. 

Home businesses — Working from home, particularly when customers visit your property or you have expensive business equipment, creates risks that you must cover separately.

Animal/breed restrictions — Although pets are typically included in the personal liability part of your homeowners policy, many insurance companies do not extend this coverage to specific dog breeds, venomous animals, or those considered aggressive or dangerous. If your pet is on this restricted list, there are rarely alternative insurance options available.

High-ticket items — While your homeowners policy limits include coverage for contents, remember that some items, including jewelry and electronics, often have a maximum standard coverage amount. (See the 50% to 70% of home value rule above.) If you have heirlooms, antiques, an extensive wine collection, fine art, an expensive engagement ring or any other valuable collectibles, consider increasing your limits or securing a special policy. This is often called a "personal property floater."

Unique property features — If any parts of your home could be described as unusual or “above and beyond," consider increasing your allowable policy limits. Examples include chef-grade appliances, specialized flooring or unique architectural details such as copper roofing. All of these would far exceed the standard coverage amounts. Consider outside features as well. A pool, a trampoline or another piece of equipment may dictate the need for an umbrella policy or more liability protection.

Don't guess. Ask Rathbun!

Every homeowner faces unique risks. Your Rathbun Insurance Agent will help you identify and assess property values based on your geographic location, the type of home you have and how you use it. To facilitate this process, your agent may ask you to complete a home inventory or lifestyle and usage questionnaire, provide pictures, or forward details of remodeling or building projects.

Answer your agent's questions completely and share your expectations and standards for replacement if you face a loss. This honest assessment and dialogue will help you identify the right policy limits for your situation and deliver the level of comfort you need to enjoy your home and possessions for many years to come.