First—some basic information
When you bought your home and insured it for the first time, your agent probably measured the home and asked you for basic information about the number of bedrooms, bathrooms, living spaces and extras like a fireplace, deck, finished basement—and dogs (because certain breeds may increase your rates). Based on the size, construction and interior finish of your home, it was insured for a certain amount, which is listed on your policy as either the Actual Cash Value or the Replacement Cost. Remember, that what you are insuring is the cost to repair or rebuild your home—and that does not include the value of the land. In other words, the value shown on your policy does not include the value of your lot.

Most insurance companies have a formula for increasing the amount of coverage every year, to keep pace with increases in the cost of materials and labor. So, if you’ve owned your home for a while, you’ve probably seen small annual increases in the covered amount, and most likely in your insurance premium. But, a formula that automatically increases the value of a home is not perfect. And, sometimes the coverage amount is overstated.

Ask for a home insurance policy review
Each insurer has a different approach to when and how they will review a home’s value, so ask your agent or call your insurance company. The time to do this is before your policy renews, so that the value can be re-assessed and your insurance premium can be adjusted before your bill arrives.

What you can expect is that either your agent or an underwriter at the company will ask you a series of questions about your home, in order to determine the current value for which it should be insured. Common questions include whether you’ve replaced any major items like a furnace or hot water tank, the condition of your appliances and flooring, and other items that have changed since you first insured your home. If this re-assessment shows that your home value was actually higher than it should have been, you can expect a rate adjustment at your next policy renewal.

What happens when market values drop?
If home values have declined in your area, you might expect your insurance bill to drop, too. Sadly, that’s not the case because what you’re insuring is the cost to repair your home—not to sell it. Since the basic costs of building materials and contractors’ labor rates are not going down, repair costs will continue to increase—and your insurance coverage needs to keep pace with those increases.

So, why would a home insurance adjustment ever help? Since insurance is designed to compensate you for the value of what you could lose, the cost to replace those things that depreciate over time might decrease from year to year. For example, while construction costs go up every year, the cost to replace your appliances or flooring will decrease as those items depreciate. Thus, the covered amount on your home insurance policy should increase very slowly each year—and that’s why we recommend that you double-check it.

Do a home inventory today
Ok—we know this never makes it to the top of the to-do list. But, seriously, if you spend one hour doing a video, taking digital pictures or even completing a handwritten list, it will pay off if you ever have a fire, flood damage or a theft. Once your inventory is complete, be sure to keep a copy at work or give one to a relative, so you can find it when you need it.

Compare rates and coverages every three years
Even if you don’t live in Florida or your rate hasn’t changed recently, it’s a good idea to ask another company for an insurance quote—and see what value they assign to your home, based on their questions. Every insurance company asks slightly different questions—and may provide you with a value that’s closer to your sense of the market value. And, you might find different deductibles or discounts that can help you save even more. If you decide to switch, you may want to change your car insurance, because many companies offer a multi-policy discount.

What is Home Insurance?
Required by most mortgage lenders, most standard home insurance policies will provide coverage for damage to your home (and many of the items in your home) caused by:

* Theft
* Fire and lightning
* Smoke
* Frozen pipes
* Ice and snow

Home insurance also covers injuries and property damage caused by you, your family (or pets) to other people. This liability coverage for will pay for medical payments to third parties, and legal costs if a lawsuit is brought against you. The insurance will also usually cover any living expenses you incur, if you’re unable to live in your house because of a fire or other covered incident.

What’s not covered?
Read your home insurance policy to find out exactly what is and is not covered. Typically, most insurers exclude damages caused by an act of war, nuclear accident, flood, earthquake, and terrorism, although you may be able to purchase special policies or endorsements that will cover these events. Also, any damage caused by wear-and-tear isn’t covered—this is considered maintenance, and is assumed to be the responsibility of the homeowners themselves.

How much is enough?
Mortgage lenders require that borrowers purchase a minimum amount of home insurance (typically equal to the appraised value or the purchase price of the home). But this is often not the amount of coverage you truly need. Instead, find out how much it would cost to rebuild your home, and consider insuring it for that amount. When you apply for a policy, your agent will help you establish the replacement cost by asking for detailed information about the construction and contents of your new home—and possibly by completing a home inspection.

The liability limits on a standard homeowners policy are typically $100,000, but this may not be enough to protect all of your assets. For an additional charge, you can increase this coverage to $500,000. You may also choose to buy an umbrella policy to add coverage in increments of $1 million. Generally, you would buy the umbrella policy from the same company that insures your cars.

You get what you pay for
Are you willing to pay more to have damaged personal property replaced? If so, consider purchasing replacement cost coverage with your home insurance. When it comes to valuing property, insurers generally use one of two methods. The first, actual cash value, pays you an amount equal to the replacement value of the property, minus depreciation for the years you owned the item. The second, replacement cost, is more expensive, but it pays you the full value of the item today, so that you can replace the old item with a new one.

Most home insurance policies limit coverage for certain high-priced or hard-to-replace items. Additional endorsements or floaters will be necessary to protect items like jewelry, furs, antiques, guns, and other valuables. You may need an appraisal for some items before the company will provide a rate.

How deep are your pockets?
To save money, consider choosing a deductible of $250, $500, or even $1,000. In the event of a loss (e.g., damage from a winter storm), you’ll be required to pay this amount out of your own pocket before your home insurance takes over, but in the meantime, this could reduce your homeowners premium.

Sound the alarm
Don’t forget to tell your insurer if you have a home security system (e.g., fire, burglar, emergency). Most insurers offer discounts for such safety features. You may also qualify for a lower insurance premium if you live near a fire department or hydrant, own a newer home, own a home built out of fire-resistant materials, or get your auto insurance from the same company.

Shop around
Get quotes from several insurance companies when shopping for home insurance. But remember, the lowest price does not always equal the best deal. Compare the coverage each policy offers, and check with your state’s department of insurance to make sure that each company you’re evaluating has a good reputation in the industry.