Homeowners Insurance

Homeowners insurance is required by the lender to obtain a mortgage. The typical homeowners policy has two main sections: Section I covers the property of the insured and Section II provides personal liability coverage to the insured. It's a good idea to insure your home for the total amount it would cost to rebuild it if it were destroyed. There are three ways to insure your home:

1. Replacement Cost: Under this coverage, the policy owner is reimbursed an amount necessary to replace the structure with one of similar type and quality at current prices, subject to a maximum dollar amount.

2. Guaranteed Replacement Cost: Under this coverage, the policy owner is reimbursed an amount necessary to replace the structure without a deduction for depreciation and without a dollar limit.

3. Actual Cash Value: Under this coverage, the policy owner is entitled to the depreciated value of the damaged property.

To determine the cost to rebuild your home, consult with an appraiser or a local builder. Note: You only need to insure the structure. You do not need to insure the land.

In the event of a serious loss -- a fire, for example -- how would I fare?

In most cases you should insure your dwelling and its contents for their replacement values, which will likely differ from the dwelling's market value and your personal property's depreciated cash value. Also consider getting a policy with automatic inflation adjustments so that the replacement cost keeps pace with the general level of price increases.

Standard coverage insures your possessions at 50 percent of the value of your dwelling. Many people boost this coverage to 75 percent with additional protection. There are individual limits on certain types of personal property (see below).

Freestanding structures on your property (garages, gazebos, tool sheds, etc.) are also covered, with standard protection equal to 10 percent of your dwelling. Trees and shrubbery normally can be replaced up to a limit of 5 percent of your dwelling coverage. 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.

Also, pay attention to what might happen if you were to lose the use of your home for an extended period. Loss-of-use provisions are important elements of homeowners policies, and coverage levels up to and exceeding 30 percent of your dwelling's insurance aren't unusual.

If someone not covered on my health insurance was to suffer a serious injury in my home, and I were found liable, how would I fare?

The standard level of liability protection in homeowners policies has been $100,000, but it's rising all the time. Today, $300,000 is not an uncommon amount, and even higher levels are recommended for affluent homeowners with substantial assets to protect. In this situation, "umbrella" policies have become popular. These policies provide excess liability coverage on both your homeowners and automobile policies, and are relatively inexpensive (you normally need to carry both underlying policies with the same insurer).

Can I afford a high deductible--say $1,000--to save money on the premium?

The differences in annual premiums between policies with deductibles of $250 (you pay the first $250 of damage, the insurer pays the rest), $500 and $1,000 may easily be worth twenty to 30 percent of the annual premium. So, if you can afford the expenditure, and want to place a small bet that you won't face a home-related loss, consider a larger deductible.