Be sure that your homeowner’s insurance protects you. Don’t get stuck with a policy that over-insures, underinsures, or doesn’t meet your needs.

How much coverage do you need?

To determine how much coverage you need, find out the insurable value of the building only. You only want to insure the building . . . not the land. If your house burns to the ground, the land will still be there.

Your insurance broker can estimate your home’s insurable value. Also, if you have a mortgage, the lender will have done a mortgage assessment. You can ask your lender for a breakdown of the assessment. It will tell you how much of your home’s value is for the building only. 

If you live in a condominium townhouse or apartment, the exterior or common parts of the building are usually insured by the condominium corporation. You are required to insure the interior and its contents. Check with your condominium manager to be sure what coverage they provide and what you must provide.

The next step is to choose between regular coverage and replacement coverage. Replacement coverage costs a bit more but it covers you to rebuild the house at current prices. Regular coverage pays only the depreciated value of the building. This will not cover the full cost to replace or repair the house. When you consider the cost of coverage and the cost to rebuild a house, it is usually wiser to go with a replacement policy. 

Mortgage lenders have a special interest in homeowner's insurance. It pays the loan if the building is destroyed. For this reason, mortgage contracts include a clause (usually called a loss payable clause) that gives lenders first claim to insurance money to cover the outstanding loan. If the mortgage amount is greater than the insurable value of the house, the lender can insist that you take out insurance on the value of the mortgage. In other words, you’ll pay for more insurance than is needed to replace the house.

How can you avoid paying for more insurance than you need? Before you make an offer to buy a house, make sure you can keep the mortgage at or below the insurable value of the building. Example Calculation

You want to get a positive number. A positive number means the house's insurable value is greater than the mortgage. A negative number means that the house's insurable value is less than the mortgage and you will need more insurance than is needed to replace the house. 

In addition to building coverage, a homeowner's insurance package will cover the contents (furniture, clothing, equipment, and other personal property). Generally, a basic package covers what you would need to start over again if everything burned or blew up. If you want to protect things like stamp, coin, or jewellery collections, you’ll need additional coverage. Or, just keep these valuables in a safety deposit box. It’s less expensive.

To get enough coverage (but not more than you need), list your possessions by description and value (keep sales receipts if you have them). Keep this information in an off-site safety deposit box to prevent loss in case of fire. 

Finally, your homeowner’s insurance package will include liability insurance. This protects you from the ruin of a visitor's fateful fall on the front steps. By the laws of most lands, you are responsible for the safety of other people while they are on your property. If anyone is injured, even though you took no deliberate action to cause the injury, you could be sued. Ask your broker to recommend the appropriate amount of liability coverage. In a world of lawsuits, there is little risk of having too much liability insurance when compared to the risk of having too little.

If you increase or decrease the value of your property, (such as by an addition or demolition of some of the building or its attachments), remember to update your insurance policy. Avoid the risk of too little coverage or the cost of too much.