Imagine finding a perfect house, getting the mortgage to make it your own and just when you've moved all your possessions [1] to your new address, the house burns down.

Not likely, but possible and that's why most lenders in most states require homeowner's insurance and why you should have it, even if you're paying cash.

What is homeowner's insurance?

Also called "fire insurance" or hazard," property" casualty" insurance,  homeowner's insurance covers your home if it is damaged by disasters that are listed on the policy.

Homeowner's insurance becomes effective as soon as your property transaction closes.

What does it cover?

The most basic policy covers your home's structure for limited disasters. Other policies provide more extensive coverage and protect your personal belongings, too.

Some policies also help pay for living expenses (housing, food and other essentials) if you can't remain in your home while it's being rebuilt or repaired following a disaster.

A summary of common policies and the coverage they provide:

Type of Policy	Coverage		Notes
HO-1 Limited Coverage	Fire or lightning Windstorm or hail Explosion Riot or civil commotion Damage by aircraft Damage by vehicle	Smoke Theft Vandalism Volcano	This policy only covers the structure of your home. It is being discontinued in many states.
HO-2 Broad Policy	All items covered by the HO-1 Policy plus: Damage caused by falling objects Damage caused by the weight of ice, snow, or sleet Damage caused by frozen plumbing heating/air-conditioning fire sprinkler system appliances Sudden and accidental bursting of heating/air-conditioning water heater fire sprinkler system Damage caused by an electrical current that is artificially generated		An HO-2 policy sometimes covers your personal belongings.
HO-3 Special Policy	Covers your structure for ALL perils EXCEPT those specifically listed in the policy Provides HO-2 coverage for your personal belongings Includes liability protection Includes coverage for additional living expenses		This policy is the most widely issued and covers both the structure of your home and your personal belongings.
HO-4 Renter	Covers your personal belongings when you rent the home you live in Includes liability protection Includes coverage for additional living expenses
HO-6 Condo or Co-op	Provides HO-2 coverage on the structural parts of the condo or co-op that you own and your personal belongings Includes liability protection Includes coverage for additional living expenses		Your condo association will carry a "master policy" that covers the shared areas of your building.

What's not covered?

All homeowner's insurance policies list disasters that are not covered. Here are the most common:

• flood or underground water
• earthquakes
• mudslides
• birds, rodents, insects, or domestic animals
• settling or deterioration of the home's structure
• lack of maintenance
• mold

Liability Protection - Is it necessary?

Liability protection is an important component of a homeowner's insurance policy, as it helps pay court costs and medical expenses if you, a family member, or a pet injures someone on your property. (It can also cover damages to someone else's possessions while they are on your property.)

For example: A plumber comes to your home to make some repairs and your playful Doberman lunges, sending him tumbling down the stairs. He fractures two ribs and is out of work for two weeks.

In this unlikely scenario, his worker's comp coverage expired two months ago. You may be liable for both his medical expenses and his loss of income resulting from the accident. Liability protection will help cover these costs.

What you should know:

Don't assume that you will be fully reimbursed if a covered item is stolen or damaged in a disaster. Policies limit the amounts paid for covered items. Jewelry and computers, for example, have a low limit. As you consider policies, be sure you know exactly what's covered and the coverage limits.

Understand how your policy calculates replacement. There are two ways to do this: actual cash value and replacement value. Standard policies calculate replacement using actual cash value. Here's how actual cash value works:

Imagine that a tree crashes through your roof and smashes your two-year old television. You file a claim with your insurance agency to have your television replaced. You expect to receive a check for the amount that you paid for the television. But the check is for half that amount. Why? Because your television has depreciated since you bought it.

Many kinds of property depreciate" or lose value over time. In this case, the television set is no longer worth what you paid for it. The insurance company calculates the replacement value by deducting an amount for depreciation. This is called actual cash value.

If you want to insure your home and belongings so that no deduction is taken for depreciation, you'll need to add replacement cost coverage to your policy. This comes to about 10% more than actual cash value coverage, but it will replace your home or belongings up to your policy limit without deducting an amount for depreciation.

What if I need more coverage?

Sometimes, a standard policy will not meet all of your coverage needs. Here are some common ways to increase coverage:

Rider	A rider is a separate policy that provides additional coverage for a specific item or situation. For example, you may have jewelry or other valuables that are worth more than the coverage limit for these items on a standard policy. Riders are commonly written for: personal property, especially jewelry, coin and other collections computer or high-tech equipment increased theft coverage extra liability coverage for home businesses
Liability Umbrella	Standard policies usually provide $300,000 in liability coverage. Experts suggest having at least two times the value of your assets. So, if your home, vehicle, and other assets are worth $400,000, you should plan to have $800,000 in liability coverage. Since your standard policy provides $300,000 in liability coverage, you could request a liability umbrella for the additional $500,000. Umbrella policies provide you with more liability coverage once you have used up the limit on your standard policy.
Earthquake	Standard policies do not cover earthquakes. You may want to buy earthquake insurance if your property is located in a fault zone.
Flood	Standard policies do not cover floods. You may want to buy flood insurance if your property is located in a flood zone, or if melting snow or ice, or a nearby creek poses a risk.
Guaranteed replacement cost coverage	If you need to rebuild during a time when construction costs rise due to high demand, this coverage will pay 20% or more above your standard policy limit.
Extended replacement cost coverage	If you need to rebuild during a time when construction costs rise due to high demand, this coverage will pay whatever it costs to rebuild your home, despite the rise in construction costs.
Building code coverage	If you have an older home, or suspect that your home may not be built to code, this coverage will pay a specific amount to bring your house up to code should you need to rebuild or repair your home as a result of a covered disaster.
Replacement cost coverage	If your belongings are covered with replacement cost coverage, you'll receive the full amount it costs to replace them up to your limit. Standard policies simply provide actual cash value for your belongings, which includes a deduction for depreciation.

How much does coverage cost?

Your policy premium is the amount you will pay for the policy. The cost of your premium is based on how much it would cost to replace your house. An insurance agent will consider these items to determine cost:

• appraised value of your property
• construction type (e.g., brick, wood, concrete)
• age of the building
• natural hazards in the area
• value of belongings (if included)
• any additional coverage requested (riders, earthquake coverage, flood coverage, etc.)

Don't skimp on coverage to reduce your insurance costs. Instead, consider these tips to keep costs down:

• Ask for a higher deductible
• Insure your automobile with the same company and ask for a multi-policy discount
• Talk to your agent about discounts for installing safety features and security devices such as
  • deadbolts
  • alarms
  • smoke detectors
  • storm shutters
  • fire-retardant roofing
• Tell your agent that you have a smoke-free household, if you do.
• Ask for a senior discount, if applicable.
• Insure your home and contents, but not your land.

Smart Tips

• Start early. Don't shop for homeowner's insurance at the last minute, especially if you are insuring an older home or if the area is prone to a natural disaster. 
• Know local costs. Remember that you are purchasing coverage to replace your home in case of disaster. Ask local builders for the cost per square foot to build a new home in your area. Then, multiply your home's square footage by this cost to determine the amount of coverage that's right for you. Do not base your coverage on your mortgage or what you paid for the home.
• Limit surprises. Don't assume complete coverage. Always ask about deductibles, limits, exceptions, and how replacement is calculated.
• Know response time. Ask insurance agents how quickly you can expect a claims adjuster to show up if you experience a disaster.
• Place coverage where it counts. Buy coverage for your home and belongings but not the land your home sits on. If you include the value of your land in your coverage, you may be over insured.
• Record your home inventory [1]. Take an inventory of your personal belongings and use photos or video to document your items. Keep your home inventory in a safe deposit box or at a friend's house.
• Save receipts. Keep receipts for expensive items that you buy or that you receive as a gift. Also keep receipts from home-remodel purchases and services.
• Report remodels and upgrades. Contact your agent any time you make improvements to your home.You will want to make sure that your policy covers any new additions and improvements.
• Report life events. Starting a home business, getting married or divorced, or having a child can trigger changes in household inventory. Contact your insurance agent if these changes affect your need for different coverage.
• Review building costs. Periodically review building costs per square foot in your area. If costs increase substantially, contact your agent and discuss the replacement value of your home. Add coverage if necessary.