Buying a new home is exciting, but it’s also inevitably expensive. Between down payments, loans, bank fees, moving services and new furniture, you will likely spend thousands of dollars just to move in. One of the expenses that new homeowners often overlook, however, is homeowners insurance. 

There are many factors that influence your home insurance policy, from your location to your deductible. Perhaps the most important factor of home insurance—and the one you should use to budget for home insurance—is the total replacement cost value of your home. 

What is the Total Replacement Cost Value of a Home? 
Your home’s total replacement cost value is how much it would cost to completely rebuild the home after a disaster, including costs related to labor and materials. This is not the same as the home’s market value. Replacement cost value may be calculated based on the value of the home per square foot. There are tools online that can help you calculate the replacement cost value of your home. It may also help to ask your insurance agent about how much coverage you need. 

In general, it’s recommended that you carry at least 80% of your home’s replacement cost value in home insurance. If you carry less than this amount, you could have unexpected gaps in your coverage when it comes time to file a claim. 

What is the 80% Rule of Home Insurance? 
The 80% rule of home insurance is a rule about how your compensation is calculated after filing a claim based on the amount of insurance you have related to your home’s total replacement cost value. If you have less than 80% of your home’s replacement cost value in home insurance, your compensation will not be calculated only based on how much insurance you have. Instead, the amount of coverage you purchased will be divided by how much you should have purchased (80% of the home’s total replacement cost value). This means that even if your policy looks like it will cover all of the damages of an accident, this isn’t necessarily true if you don’t have the right amount of coverage. 

Once you figure out your home’s total replacement cost value, you can calculate 80% of that. It’s recommended that you purchase 100% of your home’s total replacement cost value in home insurance, but 80% or more will usually cover you.