Every time a natural disaster occurs it’s natural to wonder, “What if my home were destroyed and I had to rebuild?”

Should disaster strike, a good homeowner’s insurance policy will cover the cost of rebuilding your home and replacing your possessions.

According to a 2006 survey by property insurance constancy firm Marshall & Swift/Boeckh, 58% of homes in the United States are underinsured. Put yourself in the savvy minority by following these steps to ensure adequate coverage:

Calculate the cost to rebuild.
The main purpose of a homeowner’s policy is to cover the cost of rebuilding your home should it be damaged or destroyed to calculate the amount of coverage you need, you must determine the total cost of your home. Work with a local insurance agent familiar with real estate and building costs in your area to do so. You can also purchase guaranteed replacement cost coverage—a policy that will reimburse you for actually rebuilding costs. Of course, this coverage carries a higher premium.

Determine the cost to refurnish.
A policy will cover either the cash value or replacement value of your possessions. Cash value covers current worth of an item, while replacement value covers how much it would cost to buy the item new. So unless you want to replace all your worldly possessions by shopping secondhand, opt for a replacement cost policy. Make sure that high-ticket items, such as computers, jewelry and family heirlooms, are also covered. You may have to pay more to insure them, so be sure to ask.

Cover your liability.
In addition to protecting your physical possessions, homeowner’s insurance also typically protects you if you, your family, or your pets are sued for causing injury or property damage. A common coverage range is $100,000-$300,000, but you can elect to boost that number. Most homeowner’s policies won’t cover a home-based business. If you run a home business, ask your agent if you must purchase a separate business policy.

Choose the best way to pay.
Some homeowners add their insurance premium to their mortgage payment. The lender holds the surplus funds in escrow (an account that temporarily holds funds) and forwards them to the insurance company, reducing the number of monthly payments to keep track of. If you opt to pay the insurance company directly, you may receive a discount for paying the premium annually instead of quarterly or monthly. Do a little research to find the payment method that makes the most sense for you.

Reassess regularly.
Inflation, rising building costs, renovations, and expensive purchases can all affect how much coverage you need, so be sure to check in with your agent at least yearly.

BOTTOM LINE:
Homeowner’s insurance can set your mind at ease, but only if you are realistic about how much coverage you need and diligent about monitoring your needs over time.