Homeowners insurance, otherwise known as fire insurance or hazard insurance is insurance for your house. It protects your house from many dangers, such as fire or wind damage, as well as protecting your contents or belongings from fire, theft, or other damage. Homeowners insurance also provides you and your family with personal liability coverage. So when your son bangs his bike into your neighbor's brand new car, you are protected.



But how much should you insure your home for? And who determines that?

Your home will generally have three different values: (1) how much you are taxed on, (2) how much you can sell it for, and (3) how much it will cost to rebuild it. These values are never the same. A driving factor in the value of your house is its location. My good friend built a waterfront vacation home on Lake Winnipesaukee in New Hampshire for around $300,000. The home is currently valued at over $1.5 million! Location, location, location....

Another factor in determine the value of your home is how much land is included in the property. Obviously 10 acres is probably going to worth more than acre, but what kind of land is it? Are 5 acres undevelopable wetlands? And again, you guessed it, where is it located?

When you first purchase a home, the bank is going to want you to insure the house for the amount of your loan. Many times, they won't even take into account the value of the land, which will still be there even if the house completely burns down. The insurance company wants to insure your house for the replacement cost. They do not want to underinsure you, nor do they want to overinsure you.

To determine the value of your house, many insurance companies have developed cost estimate tools. They generally need to know how old the building is, how many finished square feet it contains, how many stories, what type of roof (gable, gambrel, etc), what type of construction (frame, masonry), what type of siding (vinyl, aluminum, clapboards), etc. The more detailed the questions, the more accurate the estimate will be. Is your kitchen a basic kitchen, or does it have custom cabinets, granite countertops and a ceramic tile floor?The insurance company will also accept a replacement cost estimate from a licensed contractor in the area.

Many times the bottom line on how much you need to insure your home for depends upon what the bank will accept. It is very important that you talk with both your bank and your insurance agent. It would be foolish to overinsure your house and pay for coverage you will never receive, but it would be just as bad to underinsure and save a little money and risk a large shortfall in the event of a catastrophe.