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But how much insurance is enough?

Are you wasting money over-insuring your home? Thousands of homeowners are because they're insuring their homes for the amount of the mortgage rather than for the replacement cost of the house.

Or are you underinsured? If your insurance has not kept pace with the cost of rebuilding your house in the event of a total-loss fire, you may learn your policy won't pay your full loss, even if you have a minor fire. This result can occur if your policy has a co-insurance clause that requires insurance for at least 80 percent of the home's replacement cost.

What is the right amount of insurance?

Every owner-occupied home should have a homeowner's insurance policy for the cost of rebuilding the home if it were destroyed by fire. However, this amount does not include land value or the cost of the concrete foundation, which would not be destroyed in a fire.

Unfortunately, many mortgage lenders mislead their borrowers into believing they must have a homeowner's insurance policy for at least the amount of the mortgage balance. They perpetuate the myth because it is easy to see whether the borrower has enough insurance. However, the amount of the mortgage has absolutely nothing to do with the fire insurance.

Many states have laws prohibiting over-insurance. Although you might think insurance companies want to sell as much insurance as possible, they know over-insurance encourages arson. Most lenders accept guaranteed replacement cost policies, if the insurance is not for at least the mortgage balance.

To illustrate why over-insurance is a waste of money, suppose you buy a $200,000 home on a large lot. Your insurance agent estimates the 2,000-square-foot home will cost $75 per square foot, or $150,000, to rebuild if it is destroyed by fire. You made a $20,000 cash down payment and obtained a $180,000 mortgage. If you insured for the amount of the loan, you would be wasting your money on $30,000 of unnecessary insurance. The solution is to buy a $150,000 guaranteed replacement cost policy.

How do you determine your home's replacement cost? You could hire a professional appraiser to estimate the cost, but a much cheaper way is to invite one or more insurance agents to inspect your home and give you their estimate of its replacement cost.

Cut your insurance cost by paying the small claims yourself. You can save even more if you lower the liability limit. Liability coverage pays a person who is injured on your property, such as a visitor slipping on a porch step. Coverage of at least $100,000 to $300,000 is recommended. But you can often save money by lowering your homeowner's insurance liability coverage and buying an inexpensive $1-million or $2-million "umbrella policy" with the same insurance company.