How Much Dwelling Coverage Do I Need for Homeowners Insurance?

Homeowners have many things to think about when it comes to best protecting and maintaining their homes. One major consideration should always be a homeowners insurance policy. Most of these types of policies typically include coverage for liability, personal property, and for the structure of the dwelling itself. But how much dwelling coverage for homeowners insurance do you need? Let’s get into it …

What Is Dwelling Coverage?

Dwelling coverage – also called dwelling insurance – is the part of your homeowners insurance policy that will help pay for either repairing or rebuilding damages to the structure of your home if the damage occurs as a result of a covered peril. 

Some common risks that are covered include:

• Fire
• Storm damage (from wind, hail, snow, ice, or lightning strikes)
• Acts of vandalism
• Explosions
• Damage from an aircraft or motor vehicle
• Theft
• Falling objects

Always be sure to check the specifics of your individual policy to determine which events are covered as it can vary from state to state or even from one region to another. If you need help understanding your policy, please feel free to contact the Independent Insurance Associates team. We’re happy to help!

Loan Amount vs. Insured Amount

Almost all lenders will require that you carry enough dwelling insurance to cover 100% of the replacement cost of the house to protect both you and your lender from financial loss. This value is usually based on the square footage and type of home, as well as the building cost and sometimes the purchase price. 

When determining how much dwelling coverage for homeowners insurance you’ll need, be sure to account for expensive built-in appliances like the water heater and HVAC system. 

Some lenders may only require that you carry enough insurance to pay off the balance of your loan rather than the whole replacement value of the home. In this case, the coverage is only intended to protect the lender from financial loss rather than both of you. Unfortunately, in this case, you may not actually have enough money to rebuild your home if something were to happen. 

Keep in mind that mortgage lenders usually base the required level of dwelling coverage on the home itself. It does not take into account additional structures on the property or other assets. Assess the valuable things throughout your property in order to ensure you don’t have any gaps in your homeowners insurance policy.

Actual Cash Value, Replacement Cost Value, and Guaranteed Replacement Cost

There are three types of dwelling coverage for homeowners insurance. Understanding which type your dwelling coverage falls under will help make sure you get adequate reimbursement to repair or rebuild your home.

Actual Cash Value (ACV)

The ACV is the value your home would be worth if sold on the market, minus any depreciation. Keep in mind that while land usually grows in value over time, the home structure value diminishes due to the wear and tear. If you have an ACV policy, it could very likely not be enough to cover the cost of repairing or rebuilding your home or to cover your loan amount. It’s kind of like buying a brand-new car – it begins to depreciate “the moment you drive it off the lot.” A house starts to lose its value when you start living there.

Replacement Cost Value (RCV)

The RCV is the amount it would cost to replace your home in the current market including current labor and material prices. As this type of policy will cover more than the ACV policy, it is more expensive and will usually have some limits within the policy. Replacement value policies do cover the cost of replacing your home and belongings, but that amount may not equal your loan amount.

Guaranteed Replacement Cost (GRC)/Extended Replacement Cost (ERC)

GRC/ERC is an extended version of the RCV that will pay for the repair or replacement of your home, taking into account current costs of labor and materials, and also agrees to pay for a certain percentage of costs that go beyond the policy’s limits. If the cost of materials and/or labor goes up suddenly, but temporarily (in the case of a pandemic or natural disaster), you will still be guaranteed coverage.

Deciding which type of coverage you should choose can depend on what you can afford. While Guaranteed Replacement Cost is the most comprehensive, it is also the most expensive. Any degree of coverage is better than none at all.

Cost of Dwelling Coverage

As the cost of dwelling coverage is lumped together with the other parts of your homeowners insurance policy, the cost accounts for only a percentage of the amount that you’ll pay for your overall policy. It is, however, one of the parts of the policy that has the biggest effect on the total. 

Most homeowners insurance companies will require that you are insured for a minimum of 80% of the replacement value of your home. If you do not follow this 80/20 rule, you’ll likely receive less money when filing a claim. We know that a dwelling isn’t just your house, it’s your home. At Independent Insurance Associates, you can trust that we will work our hardest to make sure that your home is properly insured without making too big of a dent in your pocket. Get a homeowners quote today!