Anyone who owns a home knows that homeowners insurance is essential. It’s coverage you need to have in the event your home suffers significant damage. But understanding just what your insurance covers is not as simple as it sounds, and reviewing your coverage regularly is a prudent idea.

Are you covered for floods? Fires? Earthquakes? All three? Does your policy provide guaranteed replacement cost—which, for obvious reasons, since houses appreciate in value, may be almost prohibitively expensive? And what about exclusions? Many homeowners aren’t sure exactly what their coverage will pay for.

Financial advisors at consumer resource The Motley Fool suggest asking yourself three pointed questions when purchasing or renewing homeowners insurance:

  1. What does it cost to build in your area? There’s no way to price disaster insurance effectively without knowing what it would cost to rebuild your home. You need to know the per-square-foot average construction cost for your zip code—a number you should be able to get from a reputable insurance agent—then multiply that by the total area of your home to get the replacement cost. Insure for that amount, and then recheck the pricing regularly.
  2. What risks does your home face? Exclusions and riders are common for homeowners insurance. In Colorado, for example, policies frequently exclude damage from mold, since mold doesn’t thrive in the state’s dry climate. Other common exclusions apply to older homes, where outdated plumbing or fixtures may lead to greater risks. Be sure you understand exactly what risks your insurer will be covering.
  3. What’s my back-up fund like? The best way to save money on a homeowners policy is by taking on a higher deductible. But the higher your deductible, the less likely you will be to put in a claim for any lesser damages that may occur. You will need to have an emergency fund large enough to cover the gap in the event you ever need to.

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