Buying a home is the single largest investment that most people made. Your main line of defense in protecting that investment is homeowners insurance. There are different homeowners insurance forms that would provide coverage for damage to your home and to your belongings caused by different perils.

One form is the basic form and it covers very few perils. The, there is broad form that covers many perils including everything that the basic form covers. Lastly, there is the special form which covers the most perils. You would want the special form because the difference in the premiums is not really that much. It is definitely worth getting the additional coverage.

The major coverage of a homeowner's policy

The dwelling amount is the coverage you'll need to rebuild the house. Bear in mind that the market value is different from the replacement value and you should make sure that the policy includes the wording, "Guaranteed replacement cost". You need to be careful that you are not under-insuring yourself. That is because most policies contain the verbiage that limits a claim on a dwelling by a twenty percent increase over the insured's dwelling amount.

Here's an example:

You purchase a house for $100,000, which is the market value, but the cost to rebuild the home is $150,000. So if your house burns to the ground, you will only be insured for $120,000 and you will have to come with the $30,000 difference. That's a lot of money to come up with at the time of a claim.

The only way to avoid this situation is to have a pretty good idea about the true replacement cost.

So how do you figure the replacement cost?

It is recommended to ask an insurance agent to construct a replacement cost value. Also, look at the cost to rebuild a new home comparable to yours in the area. You should know that the replacement cost only applies to how much it would take to rebuild a new home. It does not include the cost of the land.

The Actual Cash Value

If you don't have a replacement cost on your policy, then the dwelling amount and/or its contents will be covered for actual cash value. Actual cash value is the replacement cost minus the depreciation, which is the percentage for every year of the age of your home.

Let's say you purchase a table for $500 five years ago and the cost of a new table today is a thousand dollars. Then five years times the depreciation percentage, say 7 percent per year, will be multiplied by $1000. You will have a depreciation of $350.

So, the true depreciation cost is a thousand but if you don't have replacement cost on your policy, the actual cash value would only be $650, which is $1000 minus the 350 depreciation value.

Which would you rather receive? So, make sure that you have replacement cost value on the dwelling and its contents.

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