Homeowners: Do you know what your policy covers?

by Center for Personal Finance editors

MCLEAN, Va. (6/22/06)--Last week was the official start of hurricane season, yet it's a call to action for all homeowners: Make sure you know what your homeowners policy does--and does not--cover, because you may be woefully unprepared for any disaster in any part of the country (USA Today June 16).

It's estimated that 60% of U.S. homes are undervalued, with the average home being undervalued by 22%. This means there's insufficient insurance to rebuild if the house is totally destroyed.

Review your policy and know what it covers. More insurers are cutting back on coverage--or raising prices--because of losses from recent disasters. In risky areas, homeowners may be required to purchase a separate policy for wind damage. If you live in a hurricane-prone area, you may be required to fork out 1% to 5% of the insured value of the home before insurance kicks in.

The Insurance Information Institute recommends sufficient insurance to cover:

The structure of your home; Your personal possessions; The cost of additional living expenses if you need to live somewhere else while your damaged home is being repaired; and Your liability to others.

Know whether you have a "replacement-value" policy or an "actual cash value" policy. The former generally costs more. Remember that damage from floods and earthquakes is not covered by a standard homeowners insurance policy, and your policy will not cover damage due to lack of maintenance, mold, termite infestation, and infestation from other pests.

If you need to update and make changes to your policy, don't postpone making the call. No insurance company will write a policy when a tropical storm is headed your way.

For more information, read "What Do You Mean That's Not Covered? FAQs about Homeowners Insurance" in the Home & Family Finance Resource Center housing section.