What Percentage of Your Home’s Value Should Be Insured?

Buying a home is likely the largest investment most people will make in their lifetime. But just purchasing a house isn't enough—protecting it is just as important. That’s where home insurance comes into play. But many homeowners ask a crucial question: What percentage of your home’s value should be insured?

Understanding the right home insurance coverage percentage can mean the difference between being fully protected in a disaster—or facing devastating financial losses. In this blog, we’ll break down the ideal coverage percentage, the risks of being underinsured, and how local insurance agents can help you accurately assess your needs.

Why Proper Home Insurance Coverage Matters

Whether you're a first-time buyer or a long-time homeowner, you may think that simply having a homeowners insurance policy is enough. But the real protection lies not just in having insurance, but in having enough of it.

Unfortunately, many homeowners unknowingly underinsure their properties, often mistaking the market value of their home for the amount they should insure. This mistake can lead to serious consequences in the event of a fire, natural disaster, or other property damage. Imagine a fire destroying your home, and when you file a claim, you learn your policy only covers 60% of the rebuild cost.

Being underinsured can delay your recovery, cost you thousands out of pocket, or in some cases, leave you without a place to live. Let’s dive into how home insurance works and how to make sure your coverage percentage is spot-on.

How Home Insurance Works

Before you calculate how much insurance you need, it’s important to understand the basics of homeowners insurance and the difference between terms that often get confused—like market value, replacement cost, and dwelling coverage.

Replacement Cost vs. Market Value

Many homeowners mistakenly insure their home based on its market value—what it could sell for. But home insurance doesn’t aim to pay off your mortgage or real estate worth; it exists to help you rebuild your home after a disaster.

Replacement cost is what it would cost to rebuild your home from the ground up using similar materials and labor in today’s economy. This number fluctuates with inflation, local construction costs, and supply chain issues. Replacement cost is what you should focus on.

On the other hand, market value includes the land your home sits on, local real estate trends, and amenities in your neighborhood. If your policy is based on market value, you’re likely underinsured.

Dwelling Coverage vs. Total Home Value

When your home insurance policy mentions "coverage," it’s primarily referring to dwelling coverage—the part that protects the physical structure of your home. It does not typically include land value, so the insurance amount is usually less than your home’s total sale price.

Besides dwelling coverage, standard policies also include:

• Personal property coverage (your belongings)
  
   

• Liability protection
  
   

• Loss of use coverage (for temporary housing if your home becomes uninhabitable)
  
   

But for now, let’s focus on dwelling coverage—the core element tied to your home insurance coverage percentage.

Recommended Coverage Percentage by Experts

So, what’s the magic number? According to insurance industry experts, the recommended home insurance coverage percentage is 100% of your home's replacement cost. This ensures that, in the worst-case scenario, you can rebuild your home entirely without having to dig into savings or take out loans.

Why 100% Replacement Cost is Ideal

Insuring for 100% of the replacement cost means you won’t be left with gaps in coverage. If your home is destroyed, your policy should provide enough funds to reconstruct the structure in its entirety.

Many insurance companies even require 80% or more of the replacement value to avoid penalties. Falling below this threshold might trigger what's known as a coinsurance clause, reducing your payout during a claim.

National Association of Insurance Commissioners (NAIC) Recommendations

According to the NAIC, homeowners should regularly reassess their coverage levels to make sure they match current replacement costs. They also recommend consulting with local insurance agents, who are more attuned to regional construction prices and trends.

Factors That Affect How Much You Should Insure

While aiming to insure your home for 100% of its replacement cost is the gold standard, the actual dollar amount can vary widely depending on several important factors. No two homes are exactly alike, and the same goes for insurance needs. Here are key elements that influence how much coverage you should carry:

Location

Where your home is located plays a major role in determining replacement costs—and thus, how much insurance you’ll need. A 2,000-square-foot home in rural Ohio might cost significantly less to rebuild than the same-sized home in downtown San Francisco or Miami Beach. Labor rates, accessibility, and regional regulations all influence the cost of rebuilding.

Additionally, certain locations come with built-in risks. Homes in coastal areas, for instance, may be more susceptible to hurricanes, while homes in mountainous or wooded regions might face a higher wildfire risk. These hazards increase both your insurance premiums and the level of coverage required.

Construction Material Costs

The types of materials used to build your home—whether standard lumber or luxury stone—will impact replacement cost. Homes with high-end finishes like hardwood floors, marble countertops, or custom moldings will require more expensive materials to rebuild.

Material costs also fluctuate over time. Global supply chain issues, inflation, and regional shortages can spike the prices of lumber, roofing materials, or even nails. This is why it’s a good idea to review your policy annually to ensure your coverage reflects current material prices.

Square Footage and Layout

The size of your home directly affects how much it would cost to rebuild. A larger home naturally requires more materials and labor. But beyond square footage, the layout also matters—homes with vaulted ceilings, open floor plans, or complex rooflines are typically more costly to reconstruct.

Garages, porches, decks, and basements should also be considered in your coverage amount. Some homeowners accidentally underinsure because they forget to include these features when calculating their rebuild estimate.

Local Building Codes and Regulations

If your home was built many years ago, the building codes in your area may have changed. Should you need to rebuild, your new construction will need to meet current building standards—not the ones in place when your home was originally constructed.

For example, if your area now requires hurricane-resistant windows, earthquake reinforcements, or specific energy-efficiency standards, these upgrades can significantly increase your rebuild costs. Certain policies offer "ordinance or law" coverage to help with these extra expenses, but it’s important to factor them into your overall coverage plan.

Natural Disaster Risk

Homes in high-risk zones for natural disasters will almost always require more robust—and often more expensive—coverage. That’s because the potential for severe damage is higher, and the cost of rebuilding in these areas is often inflated due to local demand for materials and contractors following a disaster.

Examples include:

• Flood-prone areas: Standard homeowners insurance usually doesn't cover flood damage. You may need a separate flood insurance policy through the National Flood Insurance Program (NFIP) or a private provider.
  
   

• Earthquake zones: Homes in areas like California may need specialized earthquake coverage not included in standard policies.
  
   

• Hurricane-prone regions: These homes might require higher windstorm coverage limits or special deductibles for hurricane damage.
  
   

• Wildfire zones: Homes in regions like the Pacific Northwest or parts of Colorado face rising premiums and stricter underwriting due to wildfire threats.

These factors combined emphasize why there’s no universal dollar amount that fits every home. Working with a local insurance agent—especially one who understands your region’s building codes, labor rates, and weather risks—can help you pinpoint the right home insurance coverage percentage tailored to your specific situation.

What Influences Your Home Insurance Needs?

Every home is unique. That’s why the right coverage amount should reflect not only your home's size and age but also your location, features, and the risks tied to where you live.

Local Construction Costs

If your home is in an area with high labor or material costs, your rebuild estimate will be higher. Supply chain disruptions and inflation have also contributed to rising construction costs across the U.S.

The Bureau of Labor Statistics notes that the cost of construction materials has risen steadily over the past few years—meaning replacement cost estimates must be adjusted accordingly.

Age and Condition of Your Home

Older homes may require specialized craftsmanship or materials (like plaster walls or ornate woodwork), making them more expensive to rebuild. Outdated wiring, plumbing, or roofing systems can also impact insurance premiums and coverage needs.

Unique Features or Upgrades

If you've added high-end appliances, custom cabinetry, or energy-efficient features, your replacement cost has likely increased. Be sure to tell your insurance provider about any upgrades so they can adjust your coverage accordingly.

Hazard Risks (Flood Zones, Wildfires, etc.)

Your location plays a huge role. Homes in wildfire-prone areas (like California), hurricane zones (like Florida), or floodplains will need additional or specialized coverage. Many standard home insurance policies don’t cover floods or earthquakes, so you may need extra policies based on your regional risk profile.

How to Calculate the Proper Coverage Amount

Now that you know what should be covered, how do you figure out the exact dollar amount?

Use Online Tools or Calculators

There are many reputable online calculators that estimate your home’s replacement cost based on square footage, construction type, and location. 

Talk to a Local Insurance Agent

Online tools are helpful, but nothing beats the local insight and accuracy of a professional. Local insurance agents understand regional construction costs, climate risks, and community standards. They can help fine-tune your policy and spot gaps you may overlook.

Get Quotes Based on Your Property Specs

When comparing homeowners insurance quotes, provide as much detail as possible—foundation type, roof material, insulation, square footage, year built, etc. The more specific you are, the more accurate your estimates will be.

Why Local Insurance Agents Help You Get Accurate Coverage

When it comes to ensuring you’re not underinsured, local expertise matters. National averages are helpful, but your home insurance coverage percentage should reflect the actual cost to rebuild your home in your area.

This is where IA Near Me comes in. Our platform connects homeowners with trusted, licensed insurance agents near them. These agents don’t just sell policies—they understand your neighborhood’s risks, real estate trends, and construction costs.

Need flood insurance in Louisiana? Fire protection in Arizona? Wind damage coverage in coastal Texas? Local agents on IA Near Me can guide you toward the most appropriate—and sufficient—coverage options.

Underinsuring your home can leave you financially vulnerable and unprepared in the face of disaster. The best practice is to aim for 100% of your home’s replacement cost, not its market value. Factors like local building costs, the age of your home, and hazard exposure should be carefully evaluated to determine the correct amount of coverage.

By working with local insurance agents through IA Near Me, you can gain peace of mind knowing your policy matches the true value of your home.

Need help insuring your home properly?
IA Near Me makes it easy to connect with trusted, knowledgeable local agents who understand your home’s specific insurance needs. Start your search today on IANearMe.

Frequently Asked Questions

What happens if I underinsure my home?

If your coverage is below the replacement cost, your insurance company may reduce your claim payout. For example, if your policy only covers 70% of the rebuild cost, you may only receive 70% of the claim amount—leaving you to pay the rest out of pocket.

Should I insure my home for the purchase price or rebuild cost?

Always insure your home based on rebuild cost, not purchase price. The purchase price includes the land and possibly inflated real estate value, which doesn’t factor into the cost to rebuild after damage.

Can my insurance company tell me how much coverage I need?

Insurance companies often provide estimates, but it’s up to you to ensure they’re accurate. That’s why it’s best to review your policy with a local insurance agent who knows your area and can make personalized recommendations.