You need enough insurance to cover the following:
The structure of your home:
You need enough insurance to cover the cost of rebuilding your home at current construction costs. Don't include the cost of the land. And don't base your rebuilding costs on the price you paid for your home. The cost of rebuilding could be more or less than the price you paid or could sell it for today.
Some banks may require you to buy homeowners insurance to cover the amount of your mortgage. There is often no correlation between the amount of mortgage and the cost to rebuild your home. You should base your coverage amount on the cost to rebuild your structure. Generally the insurer will never pay more than the cost to rebuild regardless of the amount of the mortgage. Paying for more coverage than you need is a waste of your income. If the mortgage amount is greater than the cost to rebuild your home, consider purchasing the guaranteed replacement cost options, which will satisfy most lenders. Also keep in mind replacement costs and inflation when choosing your coverage amount.
Your personal possessions:
Most homeowners insurance policies provide coverage for your personal possessions for approximately 50% to 70% of the amount of insurance you have on the structure or "dwelling" of your home.
To determine if this is enough coverage, you need to conduct a home inventory. This is a detailed list of everything you own and information related to the cost to replace these items if they were stolen or destroyed by a disaster such as a fire. Start by making a list of your possessions, describing each item and noting where you bought it and its make and model. Clip to your list any sales receipts, purchase contracts, and appraisals you have. For clothing, count the items you own by category -- pants, coats, shoes, for example -- making notes about those that are especially valuable. For major appliance and electronic equipment, record their serial numbers usually found on the back or bottom.
Additional living expenses:
Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20% of the insurance on your house. To determine if this is enough, you can estimate how long it would take you to rebuild your home in the case of total loss and how much your alternative living arrangements will cost. Some companies will even sell you a policy that provides you with an unlimited amount of loss of use coverage, for a limited amount of time. In most cases, you can increase this coverage for an additional premium.
Your liability to others:
Liability limits generally start at about $100,000. However, experts recommend that you purchase at least $300,000 worth of protection. Some people feel more comfortable with even more coverage. You can purchase an umbrella or excess liability policy, which provides broader coverage (including claims against you for libel and slander), as well as higher liability limits.