photo: TheTruthAbout…

Section 604 of the Fair Credit Reporting Act says that the credit reporting agencies, Equifax (EFX), Experian (EXPN) and TransUnion, may furnish reports to any company that intends to use that information for the purpose of underwriting insurance. So, at the Federal level, the use of credit reports for underwriting insurance is perfectly legal and many of them do so. The real question is, why do they do it?

Insurance companies have the same issues lenders have: understanding the risk of doing business with certain consumers. It’s not necessarily the risk of being paid or not being paid for their services (premiums). It’s more so the risk of providing a policy for someone who is more likely to file claims and thus be a less profitable customer. It’s all about the money.

The primary difference between banking and insurance is that insurance policies are all secured, essentially. If you don’t pay your premiums they’ll cut you off, which could lead to you losing your home (it’s called a non-monetary default) or you getting arrested for driving without insurance. Determining whether or not you’ll pay your premiums is not the primary reason some of them pull your credit reports and credit scores.

The primary reason is to determine if they even want to do business with you and/or under what terms. Despite what many believe, how you manage your credit is very predictive of what kind of insurance customer you’ll be. It’s predictive not only of your likelihood of filing claims but also predictive of how profitable you’ll be. If it weren’t, insurance companies wouldn’t spend the money buying millions of credit reports and scores each year.

They’re Not The Same Credit Scores

Much like the financial services environment, the insurance environment relies heavily on credit scores. This isn’t anything new. However, the type of score they’re using is not the same type of score banks and other financial services companies use. In fact, they’re very different.

The scores used by insurance companies are called Insurance Credit Bureau Scores or Insurance Risk Credit Scores. They are developed by a variety of companies, including FICO (FICO) and LexisNexis.  LexisNexis develops the LexisNexis Attract Score, which is very commonly used by insurance companies.

Insurance scores consider credit information and/or previous insurance claim information. So, if you filed an auto claim or a homeowner’s claim it can be considered in your insurance score and it can result in a lower score. And if you’re assuming the presence of claims means that you’re a less profitable insurance customer, well, you’d be right. Yes, it’s all about the money.

But They’re The Same Credit Reports

While the scores used by insurance companies are different, the reports they use are the same as the reports used by financial services companies.  The reason: all credit reports originate from the same three places; Equifax, Experian and TransUnion. Point being, there are no secret credit reports that insurance companies use to set your premiums.

Insurance Inquiries Don’t Hurt Your Credit Scores

Enough bad news. When you apply for insurance, the insurance company may or may not access your credit reports and scores. There is no guarantee that they will, in fact, pull your credit reports. But, it’s a safe bet.

If the insurance company does choose to access your credit report and score, there will an inquiry posted to the credit file.  It will clearly be identified as being from your insurance company.  And, more importantly, it will systemically be coded as coming from an insurance company.  This is good news because insurance related inquiries are not counted in your credit scores.

You will be able to see them, but no other entity will be able to see them.  And, credit-scoring systems don’t not consider insurance-related inquiries so they’ll never lower your credit scores.

I’ll end on that high note.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit.

Many people avoid buying life insurance, which is hardly surprising: they worry that it will be complicated or expensive, or that it will put them face-to-face with their own mortality (or an insurance agent; same idea).

As a result, many folks who need life insurance don’t have it, and plenty who do don’t actually need it or have the wrong kind. Mint.com has a simple, easy-to-use tool that can help you figure out whether you need life insurance, how much and what kind of policy works best for you. But life insurance is so complicated — and different people’s individual circumstances so varied, that no one tool can help answer all questions that you may have about it.

Below, you will find answers to some of the most common life insurance questions. Hopefully, those will help you further in determining what insurance you need–if any–and how to get it at a fair price.

Should I have life insurance?

You need life insurance if your death would cause a financial hardship for someone else. If that’s not the case, you don’t need life insurance, which is nothing to be ashamed of. Maybe you’re a maverick, boldly forging your own path—or just a college student, or single with no kids, or you’re retired and your loved ones are provided for or financially independent.

If you’re a sole breadwinner with multiple children, you’ll need a lot more insurance than a homemaker with an income-earning spouse and just one child. It’s all about the dependents. The homemaker probably still needs insurance, however, to cover the loss of the services they provide for free.

Okay, I need some life insurance. How much should I get?

More than you think. The most common rule of thumb is seven to ten times your annual salary. Even people whose surnames are not Trump or Warbucks routinely buy million-dollar policies.

There’s no getting around it: the big dollar figure on life insurance policies seems absurdly high. When a person dies unexpectedly, however, the money often needs to last many years, and may need to replace not only current income but future savings goals like college expenses.

“Let’s say you buy a million-dollar policy,” says Tony Steuer, author of Questions and Answers on Life Insurance. “Your beneficiary receives that amount of money and invests it. What type of return would they get on that principal? Even with a million dollars, at 4%, you’re talking $40,000 a year of income. When you look at it from that perspective, the larger amounts of coverage really aren’t out of line with what people need.”

That’s if you don’t want to touch the principal, of course. Assuming a higher rate of return or drawing down the principal means a higher rate of income replacement. But buying more insurance often adds only a few dollars to a premium, and it often takes families much longer than they expect to recover financially from a death. Yes, this is the sort of thing insurance agents are always saying, but it’s true. We’ll get to some of their more fanciful claims later.

Isn’t a million dollars worth of life insurance going to cost me, like, a million dollars?

“Term insurance is, relatively speaking, dirt cheap,” says Rob Fish, a Boston estate planning attorney. A young person (say, 35) in good health could buy a million-dollar 15-year term policy for under $30 a month.

“Fifteen-year term” means the insurance company will pay the beneficiary if you die within fifteen years of buying the policy. The company also won’t raise your premiums during that time, even if your health situation changes. You can buy longer or shorter terms, of course.

What if I’m not in perfect health? Can I still get life insurance?

Probably. “There are sixteen different health classes at most companies,” says Tyler Proffitt of Efinancial.com, an insurance broker. “The top 3% to 5% of Americans fit into Preferred Plus,” the top category. The next several categories down from there (maybe you’re a few pounds overweight or a close relative has heart disease) are still pretty good and won’t raise your premiums much.

But even people with chronic diseases can qualify for life insurance. Working with an agent who has experience with insuring people with your condition can help you get the best rate.

Googling the name of your condition plus “life insurance” can give you a sense of what insurance companies are offering. People with diabetes or heart disease, for example, routinely get coverage. “And many times, you’ll be surprised that the rates are much less than you thought they were going to be,” says Marvin Feldman, CEO of the LIFE Foundation, and insurance industry group.

People with health problems may also be able to get insurance through their employer, no questions asked.

Oh yeah, my job offers group life insurance. Should I just go with that?

It depends. “If someone’s in good health, they’re almost certainly going to do better in the individual marketplace,” says Steuer. Furthermore, most group insurance is limited to a small multiple of your salary, and the premiums go up over time.

If you’re young and have minimal insurance needs (maybe you want to carry a little insurance to cover funeral expenses) or have a health issue that would make you hard to insure otherwise, however, group insurance is great.

What if I smoke?

Quit. Smoking nearly quadruples your life insurance premiums. It’s also rumored to be kind of bad for you.

Where should I go to price life insurance?

Mint.com has its own life insurance wizard. You can get quotes from many different insurance companies in a matter of seconds and you don’t have to be a Mint.com member to use it.

You keep saying “term life” like there’s another kind. Is there another kind?

Yes, there’s permanent life.

That sounds so awesome. Sign me up.

Not so fast, Sparky. Permanent life (also known as a cash-value policy, Whole Life, or Universal Life) is an investment product fused with a life insurance policy. It works kind of like a mortgage: part of your premium goes to pay for the insurance portion and part builds up equity (“cash value”). The longer you hold the policy, the more cash value you build up, and you can keep the policy into your 90s, if you want, which you can’t do with term insurance.

You don’t sound too excited about this.

“I’m a big believer in term life insurance for the most part, since most people have temporary needs,” says Steuer. Permanent life has much higher premiums than term life; it’s complicated; and it produces relatively meager investment returns most of the time.

James Hunt analyzes life insurance for the Consumer Federation of America, and most of his clients come to ask whether they should stick with their cash-value policies. “I would say, generally speaking, more often than not I recommend a change,” he says, because often “the policies produce low or sometimes negative rates of return.”

Hunt often recommends the Universal Life products at TIAA-CREF, which have no commission or surrender fee, two common gotchas in these policies.

So, should anyone ever buy permanent life?

Yes. There are several situations where it makes sense.

First, “when somebody has a special-needs child, it makes sense, because that child will always be financially dependent,” says Steuer.

Second, permanent life insurance can be a valuable estate-planning tool. “Valuable estate-planning tool” is a euphemism for “helps you legally avoid the estate tax.” Of course, there’s no free lunch: in order to pull this off, you have to put your policy into a trust permanently controlled by someone else. “In most things in estate planning, the tension is between control and the tax benefit,” says Fish.

Finally, “I do have some people who really like the appeal of the forced savings,” says Steuer. The type of permanent life policy called Whole Life is especially well-suited to this goal.

Photo: alancleaver_2000

Call it bass-ackwards insurance: people tend to insure things they could easily afford to replace and fail to insure against financial catastrophe.

There are a lot of reasons we get this wrong. We’re optimists: we know bad things happen, but assume the worst won’t happen to us. Sure, someone might my steal my iPhone, but becoming permanently disabled? Not me.

And we hate to sit down with an insurance agent and maybe get talked into something we don’t need.

Insurance is very different from any other financial instrument, because we buy it hoping we’ll never need it. I don’t want to die young. My insurance company doesn’t want me to die young, either, because they’d lose money. It’s hard to make yourself spend money on something you don’t want.

Stephen Madeyski, a certified financial planner in Albuquerque, offers a simple rule when considering insurance. “Insure what you cannot afford to lose,” he says. In other words, insure against big, unlikely disasters–not small annoyances.

To this, I’d add my own aphorism: Insurance exists to prevent personal disasters from becoming financial disasters.

Let’s see what happens when we apply these rules to the most common types of insurance. I’ll be talking about health insurance in a separate column.

Life insurance

People make two common mistakes with life insurance: buying too little and buying the wrong kind.

Life insurance is there to protect the people who depend on your income. If you don’t have anyone who depends on your income, you don’t need life insurance.

If you do have dependents, though, you probably need more life insurance than you think. Madeyski recommends multiplying your salary by 25. “In other words,” he says, “if you need to replace an income of $100,000, then you multiply by 25, which means $2.5 million.” That’s more insurance than many planners recommend, but it’s not as crazy as it sounds: people expect a lump sum to go farther than it actually does.

Here’s a life insurance calculator from SmartMoney that can tell you whether you’re in the ballpark.

The right kind of life insurance is term life: it insures against your death during a specific period of time, and for people in good health and 65 or under, it’s quite inexpensive. Insurance agents also peddle all kinds of complicated cash-value life insurance products. “ ‘You’re insuring and you’re also saving for retirement’—that’s a red flag for me,” says Madeyski. Other phrases to avoid: “no downside,” “equity-linked,” “variable annuity.”

Smile. This is one of the few times in life you’ll encounter a genuinely black-and-white good-and-evil decision. Term life good, anything else bad.

Disability insurance

This is the black hole of insurance. Madeyski finds that his clients “tend to underinsure on the big things. And in my mind, the biggest is DI, disability insurance.”

Financially speaking, disability is a fate worse than death: your income is wiped out or reduced, but you’re still around, spending money. It’s also much more common than death. “Statistics show that we are 3 to 10 times more likely to be disabled during our working life than to actually die,” says Madeyski.

Furthermore, disability insurance is expensive. Get it through your job if you can, and through an affinity group (such as a professional organization or college alumni association) if you can’t. Individual DI is the most expensive and therefore the last resort, but it’s better than going without.

Homeowners or renters insurance

The gold standard in homeowners insurance is full replacement coverage, which covers the cost of rebuilding your home if it’s destroyed. “People should get replacement coverage,” says Madeyski, “because building costs haven’t really gone down, even though real estate values have.”

Renters insurance is cheap. To keep it that way, choose a high deductible and consider carefully whether to make a claim. The event you’re insuring against is a major burglary, fire, or other natural disaster—not a broken window from playing indoor hockey.

Extended warranties

You already know what I’m going to say about these—everyone knows that financial columnists think they’re a ripoff, but not everyone understands why. Let me explain.

On the face of it, an extended warranty seems like a good deal. You buy a new laptop. For $120 extra, it’s covered for three years. During year two, the screen blanks out during a game of FarmVille. You ship the laptop back to the manufacturer and it comes back to you good as new; you didn’t lose so much as a goat. Since the price of a new screen, labor, and shipping is more than $120, it feels like you won.

And you did: you won a particular bet. Now let’s put extended warranties on your cell phone, stereo, Blu-Ray player, and TV. And buy a new warranty every time you replace one of those items.

Now it’s not such a good deal anymore. The reason Best Buy sells those warranties is because they know that, on average, Best Buy wins the bet. But that’s also true of life insurance, and I just told you to buy life insurance.

There are two differences here, though: First, there’s only one of you, but you own a bunch of different electronics over a long period of time, so you get to diversify away the risk that any one piece of equipment will fail. Second, the loss is so minimal—the most you’re out is the price of a computer or TV—that you can afford to insure it yourself.

I don’t mean this just as a thought experiment. You could actually do this. If you’re thinking about buying an extended warranty, put the money into a savings account instead. You’ve just become your own insurance company. Over time, you’ll spend less on fixing or replacing your own stuff than you would have on warranties, and you’ll never have to argue about whether a particular mishap is covered.

Travel insurance

The New York Times travel section recently published a piece called When in Doubt, Insure. The article, however, said mostly the opposite.

“Costs can vary from about 3 to 16 percent or more of the total trip price, depending on the traveler’s age, and the cost and length of the trip,” said the Times. But that understates the cost, because most travel policies have all sorts of exceptions, and policies that truly cover everything (which is called a “cancel for any reason” add-on) are the most expensive and only cover 75% of your trip expenses.

Furthermore, collecting on travel insurance can be as much of an adventure as any vacation. That’s why it’s a staple of consumer advocate columnists, such as the Times’s own Haggler.

Buying travel insurance regularly only makes sense if you assume that, over your lifetime, 16% of your vacations will be unexpectedly canceled. Your life doesn’t suck that much, does it?

Travel insurance is basically the same as an extended warranty: expensive insurance on something you could afford to insure yourself.

There are two exceptions, however. First, if your medical insurance doesn’t cover you abroad, buy supplemental travel coverage. Second, if you usually take inexpensive vacations but have spent a decade saving up for a once-in-lifetime trip, that’s a big downside risk. Go ahead and insure it.

So, to put Madeyski’s law yet another way: When you can afford to be your own insurance company, do it.

Matthew Amster-Burton, author of the book Hungry Monkey, writes on food and finance from his home in Seattle.

photo: alancleaver_2000

Whether you rent or own, you’ll need insurance to protect you and your belongings in the case of a calamity.  

The prospect of shopping for a policy can be daunting, especially if it’s your first time – but the good news is that finding out your options can be as easy as making a local phone call. The insurance market is still very local, so speaking with an independent agent who works in your area is a good place to start, says Ben Schaum, a product manager at Progressive Insurance.

How much you’ll pay will vary from state to state and even neighborhood to neighborhood — and will obviously be based on how much coverage you want, the deductible you can afford to pay and the actual cash value or replacement cost of your belongings. The nature and location of your property — and what’s in it can also play a big role. Homeowners who have a pool, certain breeds of dogs and those who live in a flood zone, for example, will be on tap for higher premiums than those who don’t fall in either of these categories.

Before you choose an insurance company, get some feedback from neighbors, friends and relatives: what is their experience with their own provider? Then find out from the insurer itself the process for filing a claim. “The thing about insurance is you don’t know what it’s worth until you make a claim,” said Dick Luedke, a spokesman at State Farm Insurance. Last, but not least, check the insurance provider’s record with your state’s insurance department.

Figuring out How Much Risk You Can Take On

Whether you need a policy for your own home or for the place you rent, you will need to determine your policy’s deductible. That’s the amount you’ll have to pay our of pocket in the case of a claim, in order for insurance coverage to kick in. With a higher deductible you’ll pay lower monthly premiums, but should anything happen, you’ll have to make sure you can afford the lump-sum expense.  

“Everyone has to assess their personal situation,” says Luedke. “When paying your premium you are paying for the expense of operating an insurance company. You don’t want to pay any more than you have to.”

The amount of homeowners insurance you’ll need is based on the cost to rebuild your home in the case of an accident like a fire. It’s not what you can sell the home for, but what it would cost to build it back.  Homeowners insurance also covers the contents of the home, typically 75% of the insurance amount. If you own expensive items — a collection of fine art, jewelry or an impressive lineup of Manolo Blahnik shoes in your closet — you may want to take out additional insurance through what’s often called a “rider.”  

Renter’s insurance, on the other hand, doesn’t cover the structure of the place (the landlord’s policy should take care of that) – but it does cover all your contents and protects you from liability if someone hurts themselves in your apartment and decides to sue. It can even cover the legal costs if you’re sued.  You typically buy renter’s insurance in $1,000 and $5,000 increments, depending on how much your stuff is worth.  A common misconception among renters is that their belongings are protected by their landlord’s home insurance policy. On the other hand, most renters who do purchase renter’s insurance don’t realize that it covers their belongings even while they travel.

Figuring How Much Your Stuff is Worth

Both homeowners and renters have two options when it comes to determining the value of their belongings: you can go with the ACV, or actual cash value or your things, or the cost to replace them. A basic insurance policy covers the ACV, or the value of the property at the time of the loss. (This means the payout you’ll get for fast-depreciating items like consumer electronics will most likely not be enough to replace them with new ones.)

Going with insurance that covers the replacement cost will cost a little more, but ensures that you can buy all of those items with the amount you’ll receive from the insurer. While you don’t need to have receipts and/or pictures of your belonging, it doesn’t hurt to have some documentation.  The more documents you have, the easier the claims process will be.

Homeowners Insurance: What’s Covered

A home will likely be the biggest purchase in your lifetime and while having homeowners insurance in place is required of most buyers, making sure you have the right policy is equally important. It not only covers the structure of your home, but will also protect you if someone gets hurt or there’s damage to another person’s property.  Also covered is the additional cost of living elsewhere if your home becomes uninhabitable, as are any medical expenses for others accidentally injured in your home or on the sidewalk outside it. (Medical Payments coverage doesn’t cover your or family members living in the home if they get hurt.)  Keep in mind, flood insurance isn’t included in most policies and would result in an additional cost to the homeowner — unless you purchase separate coverage.  

Rental Insurance: What’s Covered

For renters there are two types of insurance: the HO-4 for apartment renters and HO-6 for condo renters. Both cover damages from fire, lightning, windstorms, explosions, civil unrest, as well as damage caused by vehicles, smoke, vandalism, theft, pipes bursting and other damage from faulty appliances. Renters insurance also includes liability coverage in case someone gets hurt in your apartment. Living expenses if your place becomes uninhabitable are also covered. But like homeowners insurance, you’ll need a separate policy for floods and earthquakes if you live in an area prone to those events. 

Those words hurt, no matter who utters them. But they are particularly painful when they come in a “Dear John” letter from your home insurer.

These days, a lot more homeowners find themselves on the losing side of the insurer-insured relationship as companies institute much more stringent rules about which customers they’ll keep and which they’ll kick to the curb. Many are turning down new business to lessen exposure to risk. And existing customers face an ugly ultimatum: Pay huge premium increases, settle for less coverage, or part ways with us. Oh, and good luck getting coverage from any of our competitors.

What raises their ire? Even the most innocuous actions — filing a single small claim, or switching insurers to save a few bucks — can lead to a swift parting of ways.

To keep your coverage intact and your relationship with your insurer solid, here are tips on avoiding the most common coverage “gotchas.”

Keep a low profile
Where you live and what the weather forecast says is coming your way might be out of your control. But you can control some behavior that may raise red flags. In the insurance world, any attention is far from flattering — in fact, even a sideways glance can damage your reputation. Here’s how to avoid unwanted attention.

Don’t file any small claims: We know you bought insurance so that you wouldn’t have to foot the bill for repairs. But it’s in your best interest to self-insure — to pay out-of-pocket with cash from your emergency cushion. A quarter of the companies surveyed by the California Insurance Department had refused to renew policies of those who filed one or two non-water-damage claims in the preceding three years. (More in a moment on why companies differentiate between water and non-water damage.)

Even the smallest claims are scrutinized closely and cost the insurance companies plenty in administrative fees. They don’t want to eat those fees, so you can bet that when it’s renewal time, they’ll get you to pay for them one way (increased premiums) or another (refusing your business).

What’s considered a “small claim”? A good reference point is your deductible — which, if it’s not already, should be around $1,000. Raising it from anything lower can save you as much as 25% on your annual premiums. If a claim is less than your deductible — or even a smidge over — it’s probably best to eat the cost and keep mum. Your altruism may even result in more savings down the road: Many insurers offer discounts for every year a customer does not file a claim.

In fact, don’t call at all: Your mother loves hearing from you regularly. Your insurer, however, does not. Policyholders risk being noted as “high-maintenance” (although wrongly) even when they simply inquire about a possible claim. If you do have to ask a question not answered in your policy materials, do it anonymously at first. (Fake a British accent; call from a pay phone.) Today’s insurers are skittish. Just asking about filing a claim can put your insurability at risk.

Be careful with water-related claims: As we mentioned earlier, insurers are wary of policyholders who file claims, but they’re especially critical of those who report something that is or may turn into water-related damage — for example, a broken pipe may hint at future sewage or mold issues. Water means ongoing problems. Many companies will take a pass on your business if you make just one or two water-related claims.

Rate-shop with care: If your premiums have been rising a lot in recent years for no reason, that’s a sign that your insurer may be trying to exit your market by driving you into the arms of another company. In that case, shopping around for savings is the right thing to do. But playing the field just to shave a few bucks from your annual premiums may not actually save you as much money as you think.

Loyalty has its rewards — and moving your business may mean sacrificing good-customer discounts you’ve earned over the years. Making no claims over a three- or five-year period can qualify you for a 5% discount for each year thereafter, typically maxing out at 25% to 35%. Plus, insurers looking to trim their portfolios will often start with newer, more uncertain customers.

Make sure your reputation is solid: The insurance industry bases decisions on whether to do business with you by assessing your risk profile, which includes the frequency and amount of your claims, as well as the underlying reasons for each claim you filed, during the past five years. This information is contained in your homeowner and auto records file. In some states, your credit history is also factored into the equation.

As with consumer credit files, you’re allowed to check your file for free once a year, and you should do so to make sure everything’s accurate and to contest anything that’s not. There are several companies that keep track, but the industry biggie is ChoiceTrust.com‘s C.L.U.E. report (which is a lot easier to remember than Comprehensive Loss Underwriting Exchange). There’s also ISO Insurance’s A-PLUS (Automobile/Property Loss Underwriting Service), which shows your car and property claims history through the eyes of an insurance underwriter. (Call 800-709-8842 to see yours for free.)

Don’t panic if you don’t have any official record on file — that just means there’s nothing to report, which is probably welcome news to both you and your insurance company.

What’s more, coverage comes in many different flavors. For example, some insurers offer guaranteed replacement policies. But these policies, which guarantee to rebuild your home no matter the cost, have proved problematic in recent years. Take the San Francisco Bay area. Insurers hit with a wave of claims from fires during the 1990s were paying $900,000 or more for homes that had originally been insured as $200,000 dwellings.

Guaranteed replacement cost policies are some of the most expensive products that fee-hunting agents offer. If you have an insurance agent with current information on construction and other costs in your area, many analysts believe that guaranteed replacement cost policies aren’t worth the extra cost.

Ideally, a good policy would cover you only for what you’d need to rebuild your home on your property. Unfortunately, too many don’t do that.

What should you buy?
Residents tend to overinsure when it comes to protection against fire and the like. But that’s not the greatest danger when it comes to homeowners’ insurance — exclusions are. Buying a policy without knowing what you won’t get, and why, is like walking into the lion’s den covered in catnip.

Consider the thousands of homeowners devastated by Hurricane Katrina. For many of the survivors, the worst damage was caused by flooding. Problem is, most hurricane coverage relates to destruction caused by high winds, rather than high water. If you’re thinking that’s a ludicrous and somewhat arbitrary line to draw, I’m with you. Just know before you buy that profit-seeking insurers usually disagree.

Foolish questions to ask before you buy
Therein lies the real problem for Foolish homeowners. Too many of us don’t know exactly what our insurers will and won’t pay for. And we’re not at all clear about how what we don’t know affects what we pay annually in premiums.

1. What does it cost to build in your area? There’s simply no way to effectively price insurance without knowing what it would take to rebuild your home. You’ll want to know the per-square-foot average construction cost for your ZIP code. Multiply that by the total area of your home, and you have a replacement cost. Insure for that amount, and then recheck pricing annually. One caveat: This data’s rarely freely available, so be sure that your agent is relying on a credible source in writing your policy. Experts at the Fool’s Insurance board suggest that Marshall and Swift’s software is among the best.

2. What risks does your home face? Exclusions and riders are common for homeowners’ insurance. In Colorado, for example, policies frequently exclude damage from mold; it’s a very dry climate, and mold doesn’t thrive in the Rockies, unless there’s constant moisture applied from a longstanding leak. Insurers here tend to view that kind of thing as owner negligence. Other common exclusions apply to older homes, where outdated plumbing or fixtures may lead to greater risks. Be sure you understand what risks your insurer is willing to accept on your behalf; they may be far fewer than you realize.

3. What funds do you have? Many posters to the LBYM board say that the best way to save money on a homeowners’ policy is through the deductible. The higher, the better — assuming, of course, that you have or could easily raise the cash to make common repairs without involving your carrier. As Foolish poster Wheee once put it, “Would I make a claim for $2,000 [in] water damage from a burst pipe … even if it was covered? Not a chance.” Call it another excellent reason to have a well-stocked emergency fund.

Follow the money
Homeowners’ insurance is essential protection for any Fool. That includes renters, too. Just because you don’t own the place, that doesn’t mean you shouldn’t protect what’s in your apartment in the event of a disaster. So be prepared, but don’t pay any more than you have to. Know the replacement costs cold, and update your numbers annually.

Now, you may think you’ve addressed all of your insurance needs, and thus be inclined to skip the rest of this article. After all, you bit the bullet and went to an insurance agent, sat through a meeting in which your agent discussed every possible type of coverage anyone could ever possibly need, and picked what you thought was a reasonable selection of policies and coverage. Doesn’t that mean you’re done worrying about insurance?

The answer, sadly, is no. Insurance is designed to protect you against risks that you face, and because the risks you face change over time, so should your insurance. Because many people are uncomfortable with insurance, they often retain policies and types of coverage that they no longer need, but fail to obtain new policies and types of coverage that they may need for the first time. Here are some guidelines for deciding whether your insurance is doing its job for you.

What to check for
With hurricanes, mudslides, wildfires, earthquakes, and other natural disasters posing a threat, insuring your home is essential for most people. When you first get your policy, figuring out what it should look like is relatively easy. Since you know what you spent to buy your home, you can be reasonably assured that your policy will insure you at least up to what you paid.

However, since real estate values rose so dramatically for such a long period, many insurance policies’ coverage limits have not kept pace. In addition, rising construction costs may require higher coverage amounts. If you don’t take an active role in managing your insurance, your insurance company may leave your policy coverage unchanged or make a small adjustment for general inflation.

For example, if you paid $200,000 for your home 15 years ago, and it’s worth $600,000 now, your homeowners’ policy may still have coverage limits that are a lot closer to $200,000 than $600,000. Indeed, many insurance companies have made changes to policies that eliminated unlimited payments for replacing your home and replaced them with provisions that put a cap on such payments — often 125% of the current policy limit. That might sound sufficient, but if the policy limit doesn’t reflect current conditions, then you still may be dangerously unprotected without even knowing it.

Fortunately, this problem is relatively easy to fix. Just look at your policy and get in touch with your insurance company to make sure your coverage does what you need it to do. If you need changes, your insurance company may be able to accommodate your needs. If the company can’t, or if it chooses not to, you can always look elsewhere to get a policy that will work for you.