How to Decide How Much Home-Owner's Insurance You Need

Make sure your pad is protected -- no matter what life throws your way.

Buying a home is a big, big, expensive deal, so it's important to protect your investment in case of fires, natural disasters, floods, burglaries or other unpleasant events. That's where homeowner's insurance comes into play. But how much coverage do you really need (after all, insurance, plus that hefty mortgage payment, can make a serious dent in your checking account)? Here are a few tips to help you figure out the right amount of insurance for your nest.

Choose a Basic Policy Type
There are two basic types of homeowner's insurance: You can buy a policy that will pay a set lump sum -- which is calculated based on the market value of your house at the time it is purchased -- should anything go wrong. Or you can buy a policy that will pay you the house's estimated replacement cost at the time of the loss or damage. This type of policy takes into consideration the appreciation (or depreciation) on your house (translation: how much the value of your house has increased or decreased). This option is more expensive, but if you've put a lot of money into the house to fix it up, it's generally worth the extra money.

Consider Your Risks
You'll want to consider what is covered under various policies. For example, risks like fire are covered by most basic policies, but from there, you'll want to consider the kinds of risks you'll be exposed to based on where you live. There is additional insurance to cover most catastrophic events like flooding, hurricane and earthquakes, and if you live in an area particularly prone to flooding or hurricanes, you may be required to purchase specific additional insurance to cover those risks.

Don't Forget What's Inside the House
You'll need to consider how you want your basic possessions, like furniture, jewelry, etc., covered. You can buy coverage based on their cash value now or their replacement value at the time of loss. But if you choose the former, which is generally less expensive, you'll get less money in the event of damage or loss, as the value of these items will almost always depreciate based on age and condition.

Be Sure to Get Liability Coverage
Finally, you'll need to decide how much liability coverage (read: insurance to protect you in case someone gets hurt in your house and sues you for the damages) you'll want the policy to provide. If you plan to have kids or have anyone work on your house (whether it's a landscaper or builder), you'll want to make sure you're adequately covered or you could end up losing your house in the event that you're sued for an accident that took place on your property.