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How to analyze your home insurance coverage

Maybe you just bought a home and are wondering how to determine coverage limits for your structure, contents and liability. Or perhaps you've had coverage for years but need to know how to read your home insurance policy so you can review what's in place to be sure you have enough protection. Either way, a smart homeowner will know the basics of home insurance, which we'll explain here.

Determine the value of your home to ensure enough dwelling coverage

home insuranceHome insurance is usually required by mortgage lenders before you close on a home. The first step is determining the coverage amount of the house. On your policy, this may be called "dwelling coverage" and is listed under the "Structure" portion. This value should not be the fair market value or include the land upon which the home is built.

A common mistake is people think the value of their home is what they paid for the house. Rather, you need enough dwelling coverage to match the full replacement cost of your home. The cost to repair damage to your home or rebuild it completely at equal quality — at current prices – is the replacement cost.

An insurance agent or appraiser can help you determine the replacement value of your home, but here’s a quick calculation:

Total square footage of your home  X  local per foot building costs = Approximate coverage amount

You can get your local costs by contacting a real estate agent or a building association. The cost of the land is not added into your calculations, but you do need to factor in current construction costs.

If you live in a floodplain, you may be required to buy flood insurance, too, by your lender. If you do not live in a floodplain, you can still buy flood insurance.

Personal property insurance

The next step is insuring your personal property, which is generally defined as anything that can be removed from the house, including furniture, rugs, art, clothes and toys. Usually, personal property coverage is set at 50 to 70 percent of the structure coverage. So if the home is insured for $150,000, personal property coverage at 50 percent will be $75,000, or $105,000 at 70 percent.

Still, if you have additional valuables, such as coins, antiques, art or jewelry, consider a separate rider. You may need to get a certified appraisal for any items covered under a rider, but you will be covered if your valuable items are damaged or stolen. Otherwise, the payout for these high-value items is typically capped at $2,500.

Liability home insurance

Next to consider is how much home liability insurance you want in case there’s an accident on your property. This number depends on how much you’ve got to lose if someone sues you and is often a combination of the equity in the home and your savings.  

In many instances liability coverage is set equal to the insured value of the home. So if the home's value is $300,000, the insurance policy will carry $300,000 in liability coverage. However, it's recommended that you carry at least $300,000 in liability to ensure your assets and savings are safe should you have to pay the medical bills for someone injured on your property or if you are sued as a result. In some states, judgments against you also could include portions of your future income.

You also might want to consider an umbrella policy, a separate policy that gives you liability coverage  above your home and auto insurance limits.

Buying a policy 

Don't make the mistake of choosing a home insurance company on price alone. Insure.com's "Best Home Insurance Companies" ranks companies on claims handling, customer service and price, based on a survey of 3,700 customers.

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