Few people can afford to replace the loss of their home. If your house burns down or is destroyed by a violent storm, or if your possessions are stolen, homeowner's insurance will pay to repair or replace what was lost. Therefore, homeowners insurance can offer valuable protection.

A common misconception is that homeowner's insurance is simply a way to pay for repairing or rebuilding a damaged home. While this certainly is an important reason to buy insurance, the homeowner's policy covers much more than that. Also know as "fire insurance", a typical homeowner's insurance package covers the home and its contents from loss by fire, theft, and other specified perils, such as lightning, wind damage, explosions, vehicle impact, vandalism, and so on. It also includes public Liability protection against injury to other people while they are on your property. Most homeowner policies do no include earthquake or flood protection, which must be purchased separately.

The proper home insurance coverage consists of getting the right type of policy, having the proper levels of protection within that policy, including special provisions for jewelry, computers, etc., and supplementing this coverage with special protection against natural disasters that aren't included in your basic policy. The key is obtaining proper homeowners insurance which protects you.

How much coverage do you need?
To determine how much coverage you need, find out the cost to rebuild the building only. You can insure the building, not the land. If your house burns to the ground, the land will still be there.

Your insurance agent can help you estimate the cost to rebuild your home. Also, if you have a mortgage, the lender will have done a mortgage assessment. You can ask your lender for a breakdown of the assessment. It will tell you how much of your home's value is for the building only.

If you live in a condominium, townhouse, or apartment, the exterior or common parts of the building are usually insured by the condominium corporation. You are required to insure the interior and its contents. Check with your condominium manager to be sure what coverage they provide and what you must provide.

The next step is to choose between regular coverage and replacement coverage. Replacement coverage (sometimes called guaranteed replacement) costs a bit more but it covers you to rebuild the house at current prices. Regular coverage pays only the depreciated.

Contents

In addition to building coverage, a "homeowner's insurance package" will covert the contents (furniture, clothing, equipment, and other personal property). Generally, a basic package covers what you would need to start over again if everything burned or blew up. If you want to protect things like stamp, coin, or jewelry collections, you'll need additional coverage by itemizing those items.

To get enough coverage (but not more than you need), list your possessions in an inventory log or video, by description and value (keep sales receipts if you have them). Keep this information in an off-site safety deposit box to prevent loss in case of fire.

Liability Insurance

Finally, your homeowners insurance package will include liability insurance. This protects you from the ruin of a visitor's fateful fall on the front steps. By the laws of most lands, you are responsible for the safety of other people while they are on your property. If anyone is injured, even though you took no deliberate action to cause the injury, you could be sued. Ask your agent to recommend the appropriate amount of liability coverage. In a world of lawsuits, there is little risk of having too much liability insurance when compared to the risk of having too little.

Structures not attached to the home

Structures not attached to your home, such as tool sheds, gazebos, or unattached garages, are covered. The amount of coverage that normally applies is 10% of the replacement coverage amount you chose for your home. A swimming pool is also considered an unattached structure. As is the case with your personal property, you should assess your needs to determine if you want to pay extra amounts to increase these levels of protection.

Additional living expenses and rental costs

If your home is destroyed or damaged and not in liveable condition, then the expense over and above normal living expenses to rent a home similar to your own would be covered until your home is repaired, you are permanently relocated, or the limit of this coverage is reached. The amount usually offered is equal to 10% of the dwelling coverage amount.

Keep your coverage up to date

If you increase or decrease the value of your property, (such as by an addition or demolition of some of the building or its attachments), remember to update your insurance policy. Avoid the risk of too little coverage or the cost of too much.

Basic policies

There are six basic kinds of home insurance policies and they're pretty much the same regardless of where you live. They tend to be defined by the perils they cover:

HO-1. Basic homeowner. Covers your dwelling and personal property against losses from 11 types of perils; fire or lightning, windstorm or hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, vandalism, or malicious mischief, theft, damage by glass or safety glazing material that is part of a building, and volcanic eruption.

HO-2. Basic homeowner plus. Covers dwelling and personal property against 11 perils plus six more: falling objects, weight of ice/snow/sleet, three categories of water-related damage from home utilities or appliances, and electrical surge damage.

HO-3. Extended or special homeowner. Covers 17 stated perils plus any other peril not specified in the policy, except for flood, earthquake, war and nuclear accident.

HO-4. Renters coverage. Covers personal property only from 17 listed perils.

HO-6. Condominium owner coverage. Covers personal property only from 17 listed perils.

HO-8. Basic older home. Covers dwelling and personal property from 11 perils. Differs from HO-1 in that it covers repairs or actual cash values, not rebuilding costs. This is for homes where some historic or architectural aspects make the home's replacement cost significantly higher than its market value.

There are variations on these policies. For example, landlords can get coverage that insures only their dwelling and not its personal property (which is what the tenant's renter's policy would cover). You can get special policies to cover mobile homes (a.k.a. manufactured housing). Most homes are covered by HO-2 and HO-3 policies.

Coverage levels

As noted earlier, there are significant differences between regular and replacement coverages. In most cases, you want to insure your dwelling and its contents for the replacement values, which will likely differ from the dwelling's market value, tax assessment, and your personal property's depreciated cash value. A policy with automatic inflation adjustments, so the replacement cost keeps pace with the general level of price increases, is very important. Homes insured under HO-8 policies are only covered for repair costs or actual cash values, since replacing them would be so costly. Owners of such homes could get replacement coverage, but the premiums are much higher.

Standard coverage normally insures your possessions at 50% of the value of your dwelling. Many people boost this coverage to 70% or 75% with additional protection. But there are still individual limits on certain types of personal property. Standard policies may fall short of covering the replacement costs of even moderate amounts of home electronics hardware or expensive possessions. For relatively small premiums, you can purchase "floaters" that will add protection to certain types of personal property.

Homeowners policies regularly provide other types of coverage, including off-premises theft protection and unauthorized use of your credit cards. Make sure you understand which provisions are included in the standard coverage you elect to purchase and which may require supplemental premiums.