Your home is probably your most valuable asset and it represents a large part of your financial and family life. Insuring your home is a very important decision to make and you need to do it correctly otherwise it can cost you a lot of money and possibly your opportunity to repair your home to its original state. To properly insure your home, you need to take out a policy that is 100% of the estimated new replacement cost. To obtain the estimated figure, there is often a formula in the insurance policy and sometimes the policy will recommend an insured figure. If you decide not to insurance on the 100% replacement value then there are some traps you should be aware of.
Insurance companies will place a penalty on you if your home is under insured. One type of penalty that you incur is that since you have not insured your home for full replacement value, when you home need to be totally rebuilt you can be short many thousands of dollars to rebuild it. The insurance company will only pay out to the policy limit. However the penalty for under insurance can be more heavily felt by you on a partially damaged home. If this is your situation consider that you partially damaged the living room, due to fire. You have insured the home for $500,000 but to replace the home as new costs $700,000. Since you do not have at least 80% of the replacement value, the insurance company will apply a depreciation value to your claim. This will leave you out of pocket for your claim to have the necessary repairs done to your home. The rule you need to apply to save yourself from this situation is to have at least 80% of your home insured at new replacement value.