Homeowner's Insurance

When you buy a home, most lenders require that you purchase homeowners insurance. Nobody likes to spend money for insurance. But if something could cause you a financial catastrophe, you should spend a relatively small amount of money to protect against losing a great deal of money.

In addition, if someone were injured or killed in your home, your home can lead to a lawsuit. The following sections tell how to get the homeowners coverage that you need.

The cost of rebuilding

If your home is destroyed, which most frequently happens from fires, your insurance policy should pay for the cost of rebuilding your home. The portion of your policy that takes care of this loss is the dwelling coverage section of the policy.

• The amount of this coverage should be equal to the cost of rebuilding the home that you own. The cost to rebuild should be based on the square footage of your home.
• Your policy's dwelling coverage amount should not be based on what you paid for the home or the amount of your mortgage.
• If you're buying a condominium or cooperative apartment, examine the coverage that your building's homeowners association carries.

Guaranteed replacement cost

Get a policy that includes a guaranteed replacement cost provision. This provision ensures that the insurance company will rebuild the home, even if the cost of construction is more than the policy coverage. Find out how your insurance company defines guaranteed replacement cost coverage -- each insurer defines it differently.

• The most generous policies, for example, pay for the full replacement cost of the home, no matter how much the replacement ends up costing.
• Other insurers set limits -- for example, they agree to pay up to 120 percent of your policy's total dwelling coverage.

Lawsuit protection

Liability insurance protects you against lawsuits arising from bad things that happen to others while they are on your property. For example, suppose a litigious passerby happens to slip on something that was left on your driveway. Carry enough liability insurance to protect at least two times the value of your assets.

Personal property protection

The amount of personal property coverage is usually set at about 50 to 75 percent of the amount of dwelling coverage. If you are a condominium or cooperative apartment owner, however, you'll generally need to choose a specific dollar amount for the personal property coverage that you want.

Some policies come with personal property replacement guarantees that pay you for the replacement cost of an item rather than for the actual value of a used item at the time that it's damaged or stolen. If this feature is not part of the standard policy sold by your insurer, you may want to purchase it as a rider (add-on provision), if such a rider is available.

If you ever need to file a claim, having documentation as to what personal property you had helps. The simplest and fastest way to document your personal effects is to make a videotape of your belongings. But be sure to place any documentation somewhere outside your home in case of a fire.