What Is the 80/20 Rule In Home Insurance?

Make sure you have adequate coverage by following the 80/20 rule in homeowners insurance.

picture of a man holding a small house
(Image credit: Getty Images)

When purchasing a home, most lenders will require you to purchase homeowners insurance. Homeowners insurance protects your home against damages, both interior and exterior, including those caused by a covered event like a burglaryfire or natural disaster. Homeowners insurance can provide great peace of mind knowing you'll be able to repair or rebuild your home if an accident occurs. 

However, to make sure you're not underinsured, be sure to follow the 80% rule, also called the 80/20 rule, in homeowners insurance.

What is the 80% rule with insurance companies?

The 80% rule in home insurance dictates that in order to receive full coverage from their insurance company, homeowners must have coverage costing at least 80% of their home’s total replacement cost value. Most insurance companies adhere to the 80% rule, and you’ll want to follow it in order to avoid any penalties for being underinsured as well as to ensure you have adequate coverage if something happens to your home. 

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Therefore, it’s important to know your total replacement cost when deciding how much coverage to get. Total replacement cost is how much it will cost to rebuild your home using current building supplies in the event of any damage.

How do you calculate total replacement cost?

According to Demont Insurance, “replacement value is typically calculated by multiplying the average local per-foot rebuilding cost by the square footage of the house.”

As it can be complicated to calculate this total, most insurance companies can estimate this value for you. However, here are the essential factors that go into calculating your total replacement cost, according to Horton Insurance Group.

  • Square footage of your home
  • Home renovations and improvements (e.g., changing flooring, appliances and fixtures; updating a roof; or installing new windows)
  • Cost of replacing materials
  • Labor costs in the event repairs are needed
  • Value of interior and exterior components

It's important to regularly review your home's total replacement cost value and adjust your home insurance coverage to ensure you're not underinsured. For example, if you've recently made renovations or home improvements, there's a chance you'll need to adjust your coverage. 

Use our tool below — powered by Bankrate — to compare home insurance rates today. 

What is an example of the 80% rule in insurance? 

Here’s an example illustrating the 80% rule in home insurance. 

Let's say you purchase a home with a total replacement cost value of $400,000 with home insurance covering $300,000. A fire then causes $250,000 worth of damage to your home. While you may think your insurance policy will cover the total cost since the cost of damages is lower than the cost of coverage, this isn't the case. 

To meet the 80% rule, if your home has a total replacement cost value of $400,000, you'd need to purchase $320,000 in coverage (80% of 400,000). If you fail to meet this rule, you won't be covered for the entirety of damages and instead will have to pay out-of-pocket to cover a portion of the expenses.

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Erin Bendig
Personal Finance Writer

Erin pairs personal experience with research and is passionate about sharing personal finance advice with others. Previously, she was a freelancer focusing on the credit card side of finance, but has branched out since then to cover other aspects of personal finance. Erin is well-versed in traditional media with reporting, interviewing and research, as well as using graphic design and video and audio storytelling to share with her readers.