Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 19, 2021

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First and foremost, it is important to understand how to read a homeowner’s insurance policy in order to understand what general types are available to you.

Your homeowner’s policy is known as a package policy.

The package consists of property coverage for the physical dwelling (other structures and contents as well) and liability coverage for any bodily injury or property damage you may cause to others.

What Are My Liability Limit Options?

Depending on the state in which you reside, the company you purchase from, and the type of policy, you can select liability limits from $25,000 to $500,000 and more.

If you have “a lot to lose,” you may even consider a personal umbrella insurance policy to extend your limit of liability up to $1,000,000 and beyond.

What Liability Limits Should I Choose?

The answer to this question depends on your personal financial situation and your risk tolerance level.

It is generally recommended that a homeowner carry at least $300,000 in liability coverage.

If your net worth is high, you may want to increase that limit up to $500,000 or more (and add the personal umbrella).

If you are highly risk tolerant, meaning you aren’t terribly worried about getting sued and having to personally pay for damages awarded to an injured party, you may choose lower limits.

A smaller insurance budget may also be a good reason to opt for lower limits.

Why Do I Need Homeowner’s Liability Insurance Coverage?

Simply owning a home puts you at risk for severe financial loss as a result of being found liable for someone’s bodily injury or property damage. Let’s look at an example of each:

Bodily Injury

Suppose a child visiting your home suffers a concussion while running around on a slippery pool deck.

The child may need to be taken to the hospital via ambulance and spend a couple of days participating in a series of tests to make sure they are not more seriously injured.

If the amount of damages exceeds your medical payments limit, you might have to file a claim to pay for the hospital costs.

In the unfortunate event there was serious head trauma (or worse, death) as a result of the accident, costs could easily surpass $100,000.

Property Damage

Perhaps your 50-year-old oak tree is struck by lightning and falls into your neighbor’s roof, causing a large hole and damaging thousands of dollars worth of their personal property.

Your liability limits would cover the costs to repair their home, replace their damaged contents, and cover expenses to stay in a hotel for a month while the repairs take place.

The examples above should clearly demonstrate the purpose of homeowner’s liability insurance. Additionally, they might make you consider taking on higher limits.

Renter’s insurance policy coverage types are similar, with the exception of the coverage for the dwelling, in that they provide you liability and contents coverage.

Contact an independent insurance agent if you are not sure what your homeowner’s liability limits are or if you are thinking about increasing or changing your coverage.

Read more: How much homeowner’s insurance do I need?