The answer to that question depends upon your specific situation. Generally, it’s wise to insure your home for 100 percent of its value (including its contents) with a replacement cost policy. Then, if it costs $100,000 to rebuild it from the ground up, that’s how much your insurance company would pay to replace your home in the event of a total loss. Likewise, if shingles are blown off the roof or cabinets are damaged by fire, no depreciation would be deducted even if the damaged property is used and worn.

If you are insured for actual cash value—as opposed to replacement cost—you will pay less for your policy, but you may not receive enough money to replace damaged property. Instead, you will receive the amount your property is worth at the time of the loss—its cost minus depreciation for age and normal wear and tear. The depreciation applies to items such as kitchen cabinets, furnaces, appliances, and most household contents. It does not usually apply to the cost of removing and disposing of damaged materials nor does it usually apply to those parts of a house that do not "wear out" such as foundations.

Some forms of property, such as fences, awnings, and swimming pools, are usually settled at cash value. So is personal property such as furniture, clothing, and appliances, unless you specifically purchase replacement cost insurance.

An inventory of your personal property will help you determine the approximate value of your possessions, and consequently, how much insurance you need, to cover your personal property. Make your inventory as thorough as possible (e.g., receipts, serial numbers of expensive equipment or appliances).  Photograph or videotape each room in detail, if possible, and keep this visual record with your written inventory. Keep the completed inventory in a safe place outside your home, such as in a safe-deposit box or at your office. This record can help you prove the value of damaged or destroyed possessions, and may help you claim a tax deduction if you suffer a loss. MetLife offers a free Personal Property Inventory booket; download it here.  Also, The Insurance Information Institute offers free home inventory software; you can download it on their website at www.iii.gov.

Ask yourself the following questions when deciding how much insurance you need:

• How much will it cost to replace my home today? You may need the help of a professional—ask a real estate appraiser, builder, or your insurance agent for an estimate. If you’ve made big improvements to your home, such as remodeling a kitchen or bathroom or building a deck, make sure your appraisal and your policy are updated to reflect the increased value.
• Am I protected for inflation? Many companies automatically adjust policies for inflation; if so, your premiums will go up to cover the rising cost of replacement. Find out if your policy has an inflation-adjustment feature. If it does not, review your policy once a year to see if your coverage is adequate.
• Am I planning any additions or renovations? Adding a family room or renovating a basement will increase the value of your home and the amount of coverage needed.
• Is my personal property fully covered? If you have many valuable possessions or have recently acquired expensive items such as televisions, computers, cameras, and musical instruments, you may need to buy additional coverage. Ask your insurance agent if you are covered for specific items of value. If not, consider purchasing extended coverage—sometimes called a floater—to protect jewelry, furs, silver and other valuables.
• Does my policy exclude coverage I may need? Some losses are specifically excluded in all policies, such as losses resulting from floods and earthquakes. If these are a danger in your area, consider obtaining additional or separate coverage.