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Hitting a home (insurance) run

Home insurance saves the day when bad luck strikes: A tornado tears off the roof. A fire destroys the kitchen. A visitor slips and falls and then sues you.

Any number of catastrophes can hit home and turn life upside-down. Home insurance helps you pick up the pieces, turn things right side up again and sleep easy, knowing your biggest investment is safe.

Home insurance covers the house structure as well as your personal belongings. It also provides liability protection in case someone sues you, and money to cover additional living expenses if you have to live somewhere else while your home is undergoing repair after a covered loss.

Types of homeowners policies

Policies vary by insurance company, state law and the type of home. Here are some of the basic standard policies you might run across:
  • HO-1 policies, which have been discontinued in most states, cover the house and belongings against 10 perils.
  • HO-2 policies cover the house and possessions against 16 perils.
  • HO-3 policies cover all perils except those that are excluded in the fine print.
  • HO-4 policies are for renters. They cover the renter's possessions against 16 perils and provide liability coverage. They don't cover the building itself.
  • HO-6 policies, designed for co-op and condominium owners, cover liability, belongings and improvements to the owner's unit. The condo association usually has a policy covering the
  • HO-8 policies are designed for older homes that would cost much more to rebuild than they are worth on the housing market. The policies pay for the cost of repairs up to the actual cash value, or market value, of the damaged structure.
Here are more home insurance basics.

Key points for home insurance buyers

Unless you're buying an HO-8 policy, you'll want to insure your home for the amount it would cost to rebuild it, not its market value. If your home burns to the ground, the insurer will reimburse you for rebuilding the house. Construction costs might be more or less than the home's market value. Remember, the cost to rebuild should not include the value of the land.

Too many people find out the hard way that they underinsured their homes. After disaster strikes, they learn the home insurance money isn't enough to rebuild the house to its former stature. United Policyholders, a consumer-advocacy group in San Francisco, offers a wealth of information about how to make sure you have enough insurance, including tips from disaster survivors.

The coverage for contents -- furniture, clothing, and other belongings -- is typically a portion, such as 50 percent, of the home's insured value. If your dwelling is insured for $300,000, for instance, the contents coverage would be $150,000.

You can get more coverage for belongings by paying a higher premium. To find out how much insurance you need for contents, do a thorough inventory. The Insurance Information Institute provides free home-inventory software at KnowYourStuff.org. Besides helping you determine how much coverage to buy, a thorough inventory will also help you work with the insurance company if you ever need to make a claim.

Keep in mind that home insurance policies typically cap the amount of coverage for valuables, such as fine art, jewelry, coins, antiques and other precious items. You'll need to buy extra coverage for those items. Here's more about insuring your valuables.

Understand the difference between actual cash value and replacement cost coverage. Actual cash value coverage reimburses you for the cost of the lost or damaged item minus depreciation. So if fire destroys your 10-year-old TV, you're reimbursed for the value of a 10-year-old TV. Replacement cost coverage reimburses you for the cost to buy a new TV.

Replacement cost coverage is pricier than actual cash value coverage, but you'll be glad to have it if you ever lose everything in a disaster.

How home insurance is priced

Home insurance premiums vary according to the amount and type of coverage you buy, where you live, the insurer offering the coverage, the deductible and your credit and loss history. See 15 ways to save on home insurance.

Understand that home insurance doesn't protect your home against everything. You need to buy separate flood insurance and earthquake insurance policies to cover damage from those perils. For more, see what your policy won't cover.

Finally, home insurance isn't something you buy once and forget about until you sell the house. Insurance agents recommend reviewing your coverage once a year to make sure you have sufficient coverage. You should increase coverage whenever you remodel or improve the home.

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