Deciding how much insurance to purchase for your new home is always a challenge. The truth is that there are many possible routes, one of which will prove most rewarding for you. Nonetheless there are a few basic principles you should be aware of.

If you are purchasing a home through a mortgage loan the source of your loan, known as the originator, is almost certain to require that you take out homeowners insurance to a sufficient degree to at least make it certain that in the event of damage or destruction you will be able to pay off the mortgage.

In the current financial circumstances it is easy to understand the concern any loan source would have regarding a loan that is no longer backed by the original property. There are a few instances in which the originator will waive the need for homeowners insurance, but usually only when the underlying lot/acreage is precious enough to offset the value of the loan. As in most instances, a building is worth more than the land it is built on, this circumstance seldom applies.

A plan should, usually, cover the cost of replacement of the building. This is not the same value as the actual value of the building. Replacement usually costs less than the market price of the building: a preexisting property is valued and sold at its market worth, which takes into account the additional costs of materials, labor and time to rebuild.

If you are comfortable restricting your insurance to a simple value that is possible, but will require specific modifications of the contract. The same applies if you want to use the oldest form of insurance, covering specific risks rather than the more commonly used broad coverage that deals with most events.

Once you have decided on the basic plan, you must consider auxiliary aspects you want covered. If there are outbuildings — sheds, barns, workshops, detached garages, boathouses and the like — you will need to arrange for their coverage also. If you want the contents of property covered that, too will need to be factored in.

Further insurance can be allocated to cover the cost of renting a residence during the time you are deprived of the use of your own property, and to insure the income you might otherwise have made if you were renting some portion of your property out.

These issues are of vital importance. If your house is of modest worth, but you own a Stradivarius violin, and the house burns down, the loss of the home may be of completely secondary importance compared to the value of the instrument.

Having determined the value of your property and the cost of replacement, you need to examine the contract to determine what exclusions the insurance company is trying to claim, and what remedies you can take if you are uncomfortable with those exclusions.

Standard exclusions address various natural problems like the earth or foundations shifting, or problems caused by neglect. In some instances excluded subjects can be addressed through secondary policies, as in the case of earthquake insurance in California. Also, be aware of the fact that no homeowners insurance policy will cover flood damage. To get flood insurance you need to get government flood insurance.

When you have factored all these issues in, gotten quotes, and compared policies, you will be in a position to determine what, for you, is the right amount of homeowners insurance.

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