Seven essential factors of homeowner's insurance

You’ve put a lot of work into your home to make it your haven from the stresses of life. But things can happen quickly to upset that peace, such as a fire, theft, or natural disaster.

With that in mind, do you have enough home insurance to protect your home and your precious personal belongings if something bad happens?

You’d be surprised at how many people don’t have enough, says David Isaac, senior product manager at Met-Life, a provider of all types of insurance, annuities, and employee benefit programs.

"I work in insurance, but I have neighbors and relatives who just don’t know what they need to protect themselves. Many times, they end up being surprised that they weren’t covered after a certain incident even though they have insurance," he says. "It just wasn’t enough, or they didn’t have the right kind."

To protect your home and family, keep reading to learn about seven factors to consider when determining how much home insurance is enough.

Factor #1: The cost to rebuild your home

When the unexpected - such as a fire or tornado - comes rolling through your home, you want to build it back the way it was before disaster struck, and that's where your home insurance comes in.

However, 16 percent of homeowners do not have enough insurance to rebuild their home if it were destroyed, according to the 11th annual "US National Homeowners Insurance Study" by market research company, J.D. Power and Associates.

But how can you make sure your house is restored to normalcy?

The Insurance Information Institute (III) recommends you ensure your home insurance covers the price to reconstruct at today’s construction costs - not what you paid for the home originally.

"For a quick estimate of the amount of insurance you need, multiply the total square footage of your home by local building costs per square foot,"  III says. You can get this information from your local real estate agent, builders association, or insurance agent.

It's also a good idea to talk with your home insurance agent about automatic inflation coverage, which updates premiums and coverage annually to reflect the cost of inflation.

"This coverage’s main purpose is to help customers avoid inadequate insurance coverage," Isaac says.

But beware - not all insurance companies have this in place. You need to sit down with your insurance agent to see if you do have automatic inflation coverage. That way, you can be sure that you'll be able to rebuild your $500,000 home for what it's worth now - instead of for the $200,000 that you purchased it for 20 years ago.

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Factor #2: The cost to replace your personal belongings

Another factor to consider is what your home insurance will cover for the items inside your home if they're stolen. So if a burglar breaks into your home and takes your television, how much will your insurance company pay you for another?

This can be a tricky question, says Isaac. It depends on what type of television you had, and whether or not your insurance covers replacement cost or the cash value of the item.

With an insurance policy that covers replacement cost, you could receive the latest flat-screen television - even if the set that was stolen was 10 years old. That's because the policy refers to the original price of the item, regardless of how old or outdated it might be. But with an insurance policy that only covers cash value, you would get only what the television is valued at today. And because of inflation and the advances in home electronics, a television you bought for $2,000 two years ago is likely worth a lot less now.

So, if you're trying to get the cheapest home insurance policy possible, a policy that covers cash value is a better option - since a policy that covers replacement cost comes with a higher premium, Isaac notes. "But at a time of loss, you will feel in a much better position to replace most of your stuff if you had the more expensive policy that includes replacement of personal property," he says.

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Factor #3: The cost to cover your valuables

So your insurance company will cover your personal belongings, but what about more unique - and expensive - items? Let's say a diamond ring has been passed down to you from your late mother, for example. It’s worth at least $10,000. You cannot find it anywhere. Will your home insurance replace it?

Unless you added what's called a rider or endorsement policy to your standard insurance, don’t bet on it.

That's because every standard insurance policy has limits on the coverage for expensive items. For example, jewelry is usually only covered up to $1,000 to $2,000 within a standard home insurance policy, according to III.

But don't worry - that doesn't mean your valuable items will have to be left uninsured. For items that are worth more than the amount that your standard policy would cover, there are riders that you can add to your homeowner's insurance that provide additional coverage beyond the regular policy.

And the rider can be written out for items like jewelry, artwork, watercraft, gun collections, and other valuables that are not covered normally, says Isaac. These items are typically appraised and in the event of a loss, the insurance company will pay you the appraised amount.

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Factor #4: The cost of damage from floods and earthquakes

Floods and earthquakes can be devastating catastrophes that destroy property. But these natural disasters are not covered under a standard home insurance policy, so you need to buy special flood or earthquake insurance for protection.

And not having flood or earthquake insurance can be a risky gamble for certain folks, Isaac says.

“You need to analyze where you live and what is around you,” he adds. “Floods can occur anytime, anywhere with flash floods from heavy rains or dikes breaking.”

Take Hurricane Irene, which came ripping up the East Coast in 2011 and flooded homes, for example. During that year, fewer than one out of 10 homeowners carried flood insurance in New England and the mid-Atlantic states, according to the J.D. Power’s annual insurance survey.

Just like floods, earthquakes can cause devastating damage as well, especially if you live in a state like California, which is notorious for earthquakes.

So, if you live in a region that is prone to natural disasters, talk to your insurer about what your coverage options are.

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Factor #5: The cost to live after a disaster

Here’s another thing to think about: If disaster strikes, whether it's a natural disaster, a fire, or something else, where will you live and how will you stay afloat financially if your home is destroyed?

You might end up in a hotel or have to rent an apartment, but you’ll still have to make mortgage payments even during the rebuilding period. So where does the money come from for essential living expenses like meals, clothing, cell phones, and other crucial items after you have lost everything?

"Most home insurance policies allow a small amount to help out people with their increased cost of living while they aren’t in their home," Isaac says. "But they won’t cover you forever."

In fact, most standard home insurance policies will cover up to 20 percent of the policy on the house, he adds. And in many situations, you can increase the temporary living expenses for a small addition to your premium.

But ultimately, every policy is different, so you really need to talk with your insurance agent about how much coverage you need. Discuss a lot of "what ifs" and understand what will be protected in those situations.

[Click to compare home insurance quotes now.]

Factor #6: The cost if someone sues you

Your sweet little great aunt falls on your stairs and breaks a hip and an ankle. Two weeks later, a lawsuit is delivered to you by her attorney.

You might not believe it, but this kind of scenario happens all the time, says Isaac.

"Accidents happen. Unfortunately, those who are injured can be your neighbors or friends at one point. If something tragic occurs, you need to have enough liability insurance," he says.

To protect yourself, you might want to consider taking out an umbrella policy or a personal excess liability insurance policy - both of which can often be bought separately from your home insurance. This type of policy can give you $1 million or even more coverage to help pay for judgments against you by a judge or jury in the lawsuit, says Isaac. It saves you from paying out of pocket or having to sell your home or belongings to pay the settlement.

The III states that most home insurance policies provide a minimum of $100,000 worth of liability insurance, but recommends that homeowners have a least $300,000 to $500,000 worth of protection.