The insurance industry funds a number of different “independent” organizations that collect data and analyze them for publication. Think of them as being a type of PR operation, largely promoting the idea of insurance or explaining some of the recent trends. The Insurance Information Institute has recently conducted a survey into how people approach the task of insuring their homes. Sadly, slightly more than half those surveyed believed the proper basis for valuing their home was the resale value. Almost one-third reported reducing the current amount of cover to save money on the monthly premium installments.

This demonstrates a continuing misunderstanding as to the purpose of insuring the home. In fact, the resale price your home would fetch on the open market has nothing to do with this form of insurance. Taking it step by step. You are not insuring the land itself although some policies do include trees and plants growing in your yard. The purpose of the insurance is to give you enough money to repair or, if the damage is substantial, to completely rebuild the home from the ground up. To ensure you have enough cover, you should approach at least two local builders and get formal quotations of the likely cost of a full rebuild. Remember the cost of labor and of all the materials needed to recreate your home has been rising steadily over the last five years. Curiously, the recession has not slowed the rise in costs. This produces the irony that it would often be cheaper to buy a replacement home than to rebuild your original home.

The average of the two quotes gives you a baseline figure for the cover to which you add a figure to replace the contents. This is always more than you think. Do a walk-through to make a list of what you own. Then estimate how much it would cost to buy secondhand. Ah, yes. Remember that unless you are prepared to pay a high premium rate, you are always replacing like for like and not new for old.

If all this produces a quote that’s too high, look at the amount of the deductible. For some purposes, the deductible is fixed and increasing from $500 to $1,000 can produce a real saving. However, note that some insurers are now imposing a deductible as a percentage of the value insured. This varies between 2 and 5%. Not surprisingly, this can be expensive should you make a claim. So before you accept any quote, always read through the policy carefully to find out exactly what deductible rules are being applied. You should also look carefully at any offers of discount based on fitting different types of alarm and monitoring systems, e.g. smoke and heat detectors. If the quotes are still to high, consider bundling home and auto insurance together. On average, this saves 10% on the price of policies from separate insurers.

Deciding how much cover to buy is relatively straightforward so long as you take the time to collect information on building costs and secondhand values. If you have items of high value or collectibles, add a separate schedule to the home insurance policy, particularly if you expect the value to rise. In such cases, the home insurance rates may rise unless you fit a safe and a burglar alarm.