In short
Insure your home for what it costs to rebuild, not for its market price. Market value includes your land and neighborhood, which never need replacing; rebuild cost is only the materials and labor to reconstruct the structure, and in many markets it's the higher number. Your dwelling coverage (Coverage A) should equal that rebuild cost, because a coinsurance clause can reduce even a small, partial claim if you insure below roughly 80% of it. Get Coverage A right first; the other coverages are priced as percentages of it. Estimate your rebuild cost to start.
A homeowners policy bundles six coverages, but the whole thing pivots on one number: Coverage A, the cost to rebuild your home. Set it correctly and every other limit falls into place. Set it to the wrong figure, usually your purchase price or a Zillow estimate, and you can be underinsured on a claim you didn't even know was at risk. This is the most common and most expensive mistake in home insurance, and it comes from confusing two numbers that sound like they should be the same.
Two numbers that are not the same
Market value is what your house would sell for. It bundles together the structure, the land under it, and the desirability of the neighborhood. Rebuild cost is only what it would take to reconstruct the physical structure (the materials, the labor, the permits) on land you already own.
Those numbers diverge, sometimes sharply:
- In an expensive metro where land is most of the price, rebuild cost can be well below market value. Insuring to market value there means overpaying.
- In many ordinary markets, construction costs, labor shortages, and code upgrades push rebuild cost above market value, so insuring to the sale price leaves the home underinsured.
The land is the key. It doesn't burn, flood away, or blow off in a storm, so it never needs insuring. You're covering the structure, and the structure's cost has nothing to do with what a buyer would pay for the location.
Insuring to market value in a high-construction-cost area is how homeowners discover, mid-claim, that their policy won't rebuild their house. The mortgage lender only requires enough coverage to protect the loan, not enough to make you whole. Their minimum is not your target.
The coinsurance trap most people never hear about
Here's the detail that turns underinsurance from "a problem on a total loss" into "a problem on any claim." Most policies contain a coinsurance clause requiring you to insure to at least a set percentage of full rebuild cost, commonly 80%.
If you meet that threshold, partial claims are paid in full (up to your limit). If you fall below it, the insurer can pay only in proportion to how underinsured you are. Insure to 60% of rebuild cost when the policy required 80%, and a partial claim can be reduced by roughly a quarter: on a $40,000 kitchen fire, that's $10,000 out of your pocket for a loss you thought was fully covered.
That's why Coverage A isn't a number to eyeball. It's the foundation the whole policy rests on, and the penalty for guessing low reaches every claim you'll ever file, not just the catastrophic one.
Get Coverage A right, then stack the rest
Once your rebuild figure is solid, the other coverages are set as percentages of it:
- Other structures (Coverage B): ~10% (detached garage, fence, shed).
- Personal property (Coverage C): 50–70% (everything inside; take replacement cost, not actual cash value).
- Loss of use (Coverage D): ~20% (hotel and living costs during a rebuild).
- Liability & medical (Coverage E & F): start at $300,000, add an umbrella policy as your net worth grows.
Estimate rebuild cost from local cost per square foot for your build quality, times your square footage, plus any custom features (a finished basement, high-end finishes, unusual construction). That gives you a defensible Coverage A instead of a lender's minimum or a real-estate listing price.
Key takeaways
- Insure the rebuild cost of the structure, not the market sale price: the land never needs coverage.
- In many markets rebuild cost is higher than market value, which is how homes end up underinsured.
- A coinsurance clause can shrink even a partial claim if you insure below ~80% of rebuild cost.
- Coverage A drives everything: B ~10%, C 50–70%, D ~20% of it.
- Your lender's required minimum protects the loan, not you: size to full rebuild cost.
The bottom line
Don't let the price on your deed decide your insurance. Figure out what it would actually cost to rebuild your house, insure Coverage A to that number, and you've protected yourself from both the total-loss nightmare and the quiet coinsurance penalty that shrinks ordinary claims. Everything else on the policy is just a percentage of getting that one figure right.
Home Replacement Cost Calculator →Estimate your dwelling rebuild cost from square footage and build quality, then see the Coverage B, C, and D limits that stack on top. Free, no email, open source.