Homeowner's insurance protects you if your home and any structures attached to it or other structures on your property are damaged or destroyed. It also covers your home's contents if they're damaged or destroyed, and it helps protect you from liability and medical costs if someone is hurt on your property. (For information on renter's insurance, see Chapter 10.)
If you own a home, no matter how modest, you can't afford to be without this coverage. If you want to keep costs down, choose a higher deductible, but don't forgo the insurance altogether. If your house were destroyed, you'd still be responsible for paying the mortgage, and you'd have to pay for housing elsewhere.
There are several basic types of homeowner's policies. They vary by the types of perils, or potential damages, covered and by the extent of coverage. For example, some policies reimburse you only for the depreciated value of your belongings. You'd have to come up with a chunk of change of your own to replace the items that were destroyed. Replacement coverage, on the other hand, reimburses you for the cost to replace those items at their current prices. You should always choose replacement coverage.
The part of the insurance that covers the house itself, or the dwelling, is based on what it would cost to rebuild the house if it were completely destroyed. Again, be sure to have guaranteed replacement coverage so the insurance company will pay whatever it costs to rebuild even if it costs more than the limits in your policy. It's important that you increase the limits as the costs of homebuilding increase. You can do this by buying an inflation rider, which increases your coverage annually at the rate of inflation, but you may end up overpaying if the value of your home decreases. It's best to review your policy every year and make sure you don't have more or less coverage than you need. Homeowner's insurance doesn't cover land, so when you are deciding how much insurance you need, exclude its value.
If you had to file a claim under your homeowner's insurance, think about how you'd prove what you lost in a fire or other damage to your home. You'd never be able to remember every item you owned. It's a good idea to take an inventory of your household belongings by going through every room and writing down each item, and to the best of your memory, when you bought it, where you bought it, and how much you paid for it. Photos are helpful for expensive or unique items. Some people use a video camera to take their inventory. Regardless of how you do it, keep a copy of the inventory someplace other than in your home so you'd have access to it if your home were damaged.