Is your home underinsured? 8 key points

Don't be cheap. Make it clear to your insurer or agent that you want the best coverage for your money, not the lowest possible premiums.

Decide on disaster coverage. Floods and earthquakes aren't covered by your homeowners insurance. If you're in an area considered at high risk for hurricanes, you may have to buy insurance from a special windstorm-coverage pool. Unless you're prepared to walk away from your home after a disaster, you need to consider such coverage.

Check your "loss of use." Homeowner policies typically provide money to pay your rent and related living expenses while your home is being rebuilt. Again, you should find this coverage on the declarations page. If the amount offered wouldn't cover you for two full years, Bach recommends asking for a higher limit or finding another insurer.

Get "replacement cost," not "actual cash value." It's not just rebuilding coverage that falls short. Many policies severely restrict how much money you'd get to replace your stuff and limit or even exclude some common household items from your policy. If you have a policy that pays out actual cash value on your home's contents, for example, you'd get a check for what your possessions were worth when they were destroyed, not what they would cost to replace.

It's much better to spring for replacement cost on your contents. You'd typically still get an initial check for the depreciated value of your items, but after you replaced them (and provided receipts to your insurer), you'd get another check to make you whole. The cost of this coverage is typically about 10% to 20% more than actual-cash-value coverage.

However, you still could be vulnerable. Some policies provide replacement-cost coverage for most items but make exceptions for others. Your policy might give you a check to buy a new couch, for example, but decide to depreciate your carpet and give you only a fraction of the replacement cost.

The only way to know how you're protected is to read your policy, front to back.

Many policies peg your contents coverage to a percentage of your overall policy limit. If your home is insured for $200,000, for example, your contents coverage might be $80,000 or $100,000 or $150,000, depending on the insurer's policies. Obviously, there's a lot of variation, and these limits don't reflect whether your furniture consists of Chippendale or chipped-and-dented. The only way to be sure you're adequately covered is to do a detailed household inventory, writing down all of your possessions and what they would cost to replace. A drag? Of course. But it's time you'll be glad you invested if you're ever faced with making a claim.

Make sure the good stuff has its own insurance. If you own something truly valuable, chances are good that your policy restricts how big a check you'd get. Most policies put payout limits of $1,000 to $2,500 on such items as jewelry, firearms, artwork and antiques. If you want full coverage, you need to purchase a "floater," or "rider," on the items at added cost. Consider your individual needs. Your policy likely has some other gaping holes.

Homeowners insurance typically won't replace equipment you use for a home-based business. Property belonging to a tenant is usually excluded. Damage from certain causes, such as a flood or sewer backup, won't be covered either. In these cases, you can get supplemental coverage -- and you probably should. (See "10 things your insurance may not cover.")

Protect yourself from lawsuits. That's the role of liability coverage. Chances are pretty good that you don't have enough protection, which means you could be in danger of losing everything you own to someone who decided to sue you.

Again, choosing how much liability to buy is tough. You can't predict who is going to sue you or for how much.

Although most insurance experts advise buying liability coverage equal to one or two times your net worth, a jury could come back with a whopping award that bears no relationship to what you own or could earn in a lifetime.

Still, trial attorneys tend to go for the easy money and often settle for the amount of your policy -- unless you're vastly underinsured. Then they're likely to go to the time and trouble of identifying, and going after, all of your available assets.

That's why Steve Vidmar, an insurance defense attorney in New Mexico, recommends that most homeowners have at least $1 million in coverage.

That means buying the maximum coverage your policy allows -- typically $250,000 to $500,000 -- plus an "umbrella" or personal-liability policy that provides coverage up to $1 million.

"I'd recommend even higher limits," Vidmar said, "for those with teenage drivers."

Fortunately, boosting your liability coverage is still relatively cheap. A $1 million umbrella policy usually costs $200 to $300 a year.

The time to make these adjustments is now. It's too easy in the chaos of living to put off investing in your coverage, but it's too late once a disaster strikes.

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on theYour Money message board.

Updated July 14, 2009

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