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If your house burns down or is damaged by a violent storm, or your possessions are stolen, you don't want to suddenly find out that your homeowners insurance pays less than you thought it would.

The following will help you decide how much insurance you need to fully insure your house and your personal possessions. Here's what you can do to avoid being underinsured:

Know that when you insure you home, you are really insuring two distinct things -- the structure of your home and your personal belongings.

There are three ways to insure the structure of your home; insuring it to replacement cost, extended replacement cost or actual cash value. Replacement cost insurance pays the policyholder the cost of replacing the damaged property without deducting for depreciation, but limited to a maximum dollar amount. An extended replacement cost policy, one that covers costs up to a certain percentage over the limit, may be purchased instead of a guaranteed replacement policy. This gives you protection against such things as a sudden increase in construction costs due to a shortage of building materials. Finally, by insuring the structure of your home for actual cash value, you would receive an amount equal to the replacement value of damaged property minus an allowance for depreciation. Unless a homeowners policy specifies that property is covered for its replacement value, the coverage is for actual cash value.

In addition, there are two ways to insure your personal belongings; for replacement cost or actual cash value. Replacement cost coverage for your personal possessions pays the dollar amount needed to replace damaged personal property with items of like kind or quality without deduction for depreciation. If you insure your belongings for actual cash value, you have insurance equal to the replacement value of damaged property minus depreciation. Unless a homeowners policy specifies that property is covered for its replacement value, the coverage is for actual cash value.
Insure your home for the total amount it would cost to rebuild your home if it were destroyed.

Do not insure your home for the market value, insure it for replacement cost. The cost of rebuilding your house may be higher (or lower) than the price you paid for it or the price you could sell it for today. The cost of rebuilding your home is based on a number of factors, including local construction costs, the square footage of your home, the type of exterior wall construction -- frame, masonry (brick or stone) or veneer, the style of the house (ranch, colonial), the number of bathrooms and other rooms, and the type of roof. Other things that affect rebuilding costs are an attached garage, fireplaces, exterior trim and other special features like arched windows.

For a quick, ballpark estimate of the cost of rebuilding your house, multiply the local building costs per square foot by the total square footage of your house. For example, suppose your home is 2,500 square feet (1,300 on the first floor and 1,200 on the second floor) and that building costs in your community and for your type of house are $100 per square foot. The cost to replace your home would be approximately $250,000. To find out the building rates in your area, consult your local builders association or ask a real estate agent or appraiser.
If you own an older home you may not be able to purchase a replacement cost policy.

Insurance companies differ greatly in how they insure older homes. Some companies will insure older homes for the full replacement cost as long as the house is in good condition. Other companies will instead offer a modified replacement cost policy where features typical to an older home such as plaster walls, wooden floors, and moldings would be replaced using the standard building materials and construction techniques in use today.

Call several insurance carriers to inquire as to how they insure an older home and consider obtaining coverage from the company whose coverage best suits your needs.
Increase the limit of your policy if you make improvements or additions to your house.

If you don't increase your limits to cover the cost of rebuilding a deck, adding another bathroom, enlarging the kitchen, or other improvements that have increased the value of your home, you may save some money on your insurance premium, but you risk being underinsured. Depending on the kind of policy you have, if you do not have sufficient insurance, your insurance company may only pay a portion of the cost of repairing or replacing damaged items.

You should take a few moments each year to consider any improvements you have made to your home and to review your homeowners insurance policy and its coverages to ensure they are adequate.
Check the value of your insurance policy against rising local building costs each year.

Ask your insurance agent or company representative about adding an "INFLATION GUARD CLAUSE" to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area.
Make an inventory of your personal possessions.

Make and keep a current inventory of your possessions. By creating a home inventory, you ensure that all of your belongings are accounted for in the event of a loss and you are better able to determine the amount of homeowners' insurance coverage you need.

Write down the major items you own along with all available information such as serial numbers, make and/or model numbers, purchase prices, present value, and dates of purchase.

Don't forget to include indoor and outdoor furniture, appliances, stereos, computers and other electronic equipment, hobby materials and recreational equipment, china, linens, silverware and kitchen equipment, jewelry and clothing in your inventory.

Take either still or video pictures of these items. Attach receipts to the inventory when available. Store the inventory and visual records away from your home - perhaps in a safe deposit box.

Add major purchases to the inventory and visual record soon after the purchase.
Check your policy to find out how much coverage you have for the contents of your home.

Check your policy's content limit. The content limit that provides coverage for personal possessions is generally 50 percent of the amount of the insurance on the home, but may be as high as 75 percent. On a home insured for $200,000, for example, the contents limit would be $100,000 or $150,000. Compare the contents limit with the total value of your home inventory. If you think you're underinsured, discuss the problem with your insurance representative.
Check the limits on certain personal items, such as jewelry, silverware, furs and computer equipment, which tend to be more expensive to replace.

If the limits are too low, consider buying a special personal property "endorsement" or "floater." An endorsement is an addition to your policy. A floater is a form of insurance that allows you to insure valuable items separately.

For example, if you own an expensive piece of artwork, you may wish to purchase extra insurance coverage for it.
Find out whether building codes in your community have changed significantly since your home was built.

Building codes require structures to be constructed to certain standards. If your home is severely damaged, you might have to rebuild it to comply with the new standards requiring a change in design or building materials. These changes usually cost more. Generally, homeowners insurance policies won't pay for this extra expense. However, some companies offer an endorsement that pays a specified amount toward these costs.
Find out if your home is located in or near a flood plain. If it is, consider flood insurance.

Standard homeowners policies do not cover damage to property, contents and structure resulting from floods. Damage to your home and possessions caused by flood could consume your life savings. However, flood insurance may be available through the federal government's National Flood Insurance Program (NFIP) which exists in participating communities. NFIP policies can be obtained through private insurance companies that write flood insurance under a special arrangement with the federal government. If your company or agent does not write flood insurance, you may call the National Flood Insurance Program's (NFIP) toll free number at 1-888-CALLFLOOD, ext. 445 to obtain the name of an agent in your area who does write flood insurance. All flood insurance policies have a mandatory waiting period of 30 days.