For most people, the purchase of a home is the largest investment they will ever make. So it makes sense that it should be adequately insured.

Instead, many homeowners make the same standard insurance mistakes, resulting in a policy that is too much or too little. Here are 6 homeowners common insurance mistakes to avoid:

Mistake #1:

Underinsured. A common trap is to ensure a home for its market value, not its replacement value. Most homeowners' insurance coverage follows the "80% rule" which means that unless the home is insured for at least 80% of its replacement value, the cost of any damage may not be fully covered. If you are trying to save money by underinsuring, it could cost you more in the long run.


Buy a policy that will enable you to completely rebuild your home and replace your possessions.

Mistake #2:

Overinsured. The flip side of too little insurance is too much. As long as you are covered for the replacement value of your home and possessions, your policy is adequate. If there have been changes, though, you may need to take a second look. Let's say, for example, that your daughter has left home and took her collection of rare Beanie Babies with her. That is many thousands of dollars in valuables coverage that you no longer need.


Calculate your home's replacement value and possessions to avoid paying too much.

Mistake #3:

No liability coverage - If a guest in your home is injured, you may be held liable. Or, if your frisky dog gets loose and bites someone, you may be liable. Insurance companies offer liability insurance that can protect you in the event of such an accident, and its cheap, too. The average liability claim is around $16,000 but you can get liability insurance for several hundred thousand dollars inexpensively.


Buy liability insurance. The cost is low and it will help you sleep at night.

Mistake #4:

No periodic review - Every state has a property tax, which means that homeowners get an annual statement reflecting the home's current value. Construction costs are rising faster than the rate of inflation, which may affect the amount of coverage you need.


Use your annual statement as your guide to adjusting the amount of insurance, up or down.

Mistake #5:

Overpaying. The cost of homeowner insurance policies can vary depending on a variety of circumstances. If, for example, your coverage is provided by your lender, the chances are good that you can cut your premium significantly by insuring with a third-party insurance company.


Ask your friends and neighbors for recommendations on which companies are providing the lowest rates while providing good service.

Mistake #6:

Not reporting improvements. When you remodel, the replacement cost of your home increases. But it won't reflect in your replacement cost coverage if you haven't told your insurance company.


Take an "improvement inventory" and report the changes to your insurer.

Being proactive on insurance coverage can save you money and help protect the largest investment you're likely to make.