What you might not know about homeowners insurance

For most people, your home is your most valuable asset, so you need to make sure it is fully protected with homeowners insurance.

A standard homeowners policy, also known as an HO3, insures against the basics like fires and theft. But, an HO3 policy has compensation limits -- and that can leave gaps in your coverage.

Depending on where you live, you may need additional protection from things like floods, earthquakes, or other natural disasters. The big question is how much coverage you really need.

My advice? Make sure your policy covers the cost of rebuilding and refurnishing your entire home. To do so, have a homebuilder come and give you an estimate for how much replacement coverage you would need.

Once you know the replacement cost of your home, you can start to weigh your options.

The first, and most popular, is called "extended replacement coverage." This generally expands your payout limit to about 125 percent of your home's value. Some policies offer an inflation guarantee. This makes sure the amount of coverage stays current with repair costs and your home's current market value. If you have both of these policies, you should be in good shape.

Don't forget your personal possessions: You may want an additional policy to cover specific items, or you can add them to your homeowners insurance.

Finally, as with all insurance policies, consider your deductibles. I suggest you opt for the highest deductible you can afford, which will lower your premiums.

  • Mellody Hobson

    View all articles by Mellody Hobson on CBS MoneyWatch»
    Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News and CBSNews.com.