How Much Dwelling Coverage Do I Need?

Could you afford to rebuild or repair your home if something happened to it tomorrow? The dwelling coverage portion of your homeowners insurance policy plays a significant role in avoiding out-of-pocket expenses. Learn more about what dwelling insurance covers, what it does not, and how to ensure you have adequate coverage to protect your most valuable asset.

What Is a Dwelling in Insurance?

In the context of homeowners insurance, a dwelling is defined as the structure of your home and any other structures attached to it, such as a garage, chimney, or deck. Heating and air conditioning systems, electrical wiring, flooring, countertops, ceilings, cabinets, vanities, and plumbing are all permanently installed fixtures in a home.

What Does Dwelling Insurance Cover?

Dwelling insurance protects all aspects of the home in the event that they are damaged as a result of a covered peril or cause. It is the primary component of homeowners insurance policies, and it assists you in rebuilding or repairing your home and any attached structures such as decks. Insurers typically cover damage caused by:

  • Hail
  • Fire
  • Lightning
  • Explosions
  • Aircrafts
  • Vehicles
  • Smoke
  • Vandalism
  • Falling objects
  • The weight of ice or snow
  • Freezing pipes
  • Theft
  • Overflow of water from the HVAC system or plumbing

For example, if a wildfire damages your home, you would contact your insurance company to file a dwelling coverage claim. If you are approved, you will pay your deductible and then receive funds to repair or replace the damaged parts of your home as well as any attached structures that were also affected.

Limits of Dwelling Coverage

While many causes are covered by dwelling insurance, some common exceptions include floods, earthquakes, sewer backup, and damage caused by neglect. Flood, earthquake, and sewer backup damage may be covered by a policy endorsement or a separate additional policy.

Dwelling coverage alone is frequently insufficient to fully recover after a total loss. Other structures on your property, such as a barn, shed, or guest house, will require additional structure coverage to be compensated for any damage to them.

Because dwelling coverage does not cover items inside the home, you'll need a personal property policy to cover items like furniture, clothing, and jewelry. And, as a homeowner, you'll probably want a personal liability policy to protect your home if you're held liable for someone else's or their property's damages.

How Much Dwelling Coverage Do I Need?

State law does not require homeowners insurance, including dwelling coverage. If you have a mortgage on your home, your lender will require you to have a certain amount of homeowners insurance. It must, in many cases, be at least equal to the amount of your mortgage. However, this is frequently insufficient to safeguard your interests.

When determining the amount of dwelling coverage you require, consider having enough to cover the costs of the labor and materials required to rebuild your home. If you lose your home, this coverage will allow you to construct a replacement of the same type and quality at current prices without having to pay out of pocket. Some lenders will require you to carry dwelling coverage equal to 80% of the replacement cost of your home, while others will require 100% coverage.

How To Figure Out How Much Dwelling Coverage You Need

Local construction costs in your area and the square footage of your structure are the two most important factors influencing your rebuilding costs. You can run the numbers by contacting a local real estate agent or builders association for an estimate of construction costs in your area.

However, other factors influence the cost of repairing or replacing your home, such as:

  • House style
  • Special features
  • Custom design
  • Materials
  • Roof design
  • Exterior wall types
  • Number of floors, bedrooms, and bathrooms
  • New building codes or ordinances
  • Hard-to-replace features
  • Inflation

Consider hiring a building contractor to create a detailed replacement cost estimate for your home if you want a custom quote. While most insurance companies use tools to generate estimates for you, getting a second opinion from an educated third party can help ensure you have the coverage you need in the event the worst happens.

Actual Cash Value vs. Replacement Cost Value

Another thing to think about is how your settlement will be calculated. The replacement cost value covers the costs of rebuilding your home at current prices, excluding depreciation. However, if your coverage is based on the home's actual cash value, depreciation would be factored into your settlement amount. Because this type of coverage may leave you with less than you need for an equivalent rebuild, many experts advise choosing replacement cost value.

Fair Market Value vs. Replacement Cost Value

It's also critical that your home's fair market value not be used to calculate your coverage amount. In the current market, market value is what a buyer would pay for your land, home, and attached structures. It also varies depending on the local market, school district, and distance to restaurants and retail stores. As a result, the fair market value is frequently different from the rebuild costs. It will frequently be too high, implying that you are overpaying for your coverage, but it may also be insufficient to rebuild.

Don’t Set It and Forget It

Replacement costs fluctuate over time, so it's critical to review your policy every year to ensure it still meets your needs. This is especially important if you have completed any home improvement projects, as the changes may increase the cost of replacement.

Dwelling Coverage for Condos

Condo insurance operates in a unique manner. It is governed by a homeowners association (HOA), so the first step in ensuring your condo's safety is to contact your HOA. It will implement one of three policies:

  • Bare walls coverage: The bare structure, fixtures, and property of collectively owned areas are the minimum amount of coverage that a HOA can choose. Condo owners are responsible for the individual units, so you would need to purchase dwelling coverage for your condo.
  • All-inclusive coverage: An all-inclusive policy includes coverage for the walls, floors, and ceilings, as well as the interiors of condo units, such as appliances, cabinets, and flooring. It also covers any modifications you make to your unit. You would not need to purchase your own dwelling coverage if you had this type of policy in place, but you would still need other coverage, such as for your personal belongings.
  • Single entity coverage: A single entity covers all real property in a condominium complex, including individual condo fixtures. It does not, however, cover upgrades or personal property, so you will most likely need additional coverage for both.

The Bottom Line

Dwelling coverage protects the structure of your home from catastrophic damage. To best prepare for an incident, make sure you have a policy that calculates your settlement based on the replacement cost of your home. Keep track of the cost of rebuilding your home over time and ensure you have adequate coverage based on inflation and any renovations you complete. Your insurance company will provide an estimate, but you can confirm it by consulting with a local building contractor.