Just got a new home, or are you just looking to properly insure the one you have?
The first thing to know when determining what you should insure your home for, is that most insurance companies will not insure your home for its market value.
The reason for that is that the market value can fluctuate. The rate can increase or decrease; therefore Insurance companies will insure your home for its replacement cost, the amount of money it would take to replace the home.
Although every company has its own calculator to determine the replacement cost, it's mostly determined by the sq ft of your home. It also takes into consideration certain features your home may have, such as whether or not you have basic, custom, or designer kitchen and bathrooms, etc.
Let’s look at an example. We will say that your home is 2000 sq ft, and we will consider that most companies want to insure your home for $80-$100 sq ft to rebuild. So, at $100 a sq ft, the replacement cost would be $200,000. Considering the features of your home, it may be higher.
There is a clause in most insurance policies that's says you must insure your home for at least 80% of the replacement cost. So, based off of the example, you cannot insure your home for anything less than $160,000. If the market value of your home is higher than the replacement cost, remember that insurance companies do not insure the land. If the house was to burn down, the land would still be there.