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Whether it's your first or 10th home, homeowner's insurance is the essential first-step to securing a loan. Lenders demand that buyers purchase homeowner's insurance to cover the cost of the mortgage. However, you should consider a policy that adjusts coverage for your home's replacement value. Too many policies simply offer coverage that is way too low.

While it may seem simple, there are many details in any standard insurance contract that require close scrutiny."It's important to choose the policy that best fits your needs," said John Karanick, senior vice president of the Atlantic Mutual Insurance Companies in Muray Hill, New Jersey.

Shopping around first will give you a better idea of your choices regarding coverage and premiums.

There are two basic programs to consider when buying homeowner's insurance: the Named Peril (HO-3) policy and the All Risks (HO-5) policy.

H0-3 policies combine limited protection against both property loss and personal liability. A standard HO-3 policy covers 18 perils, providing protection from natural disasters (such as loss by fire, smoke, lightning, windstorm or hail), accidents (such as explosions, glass breakage and aircraft or vehicle crashes) and criminal acts (such as vandalism, or theft).

It also covers ice and snow damage, water or stream leaks, frozen plumbing and accidental injury from electrical appliances and wiring.

Experts agree the majority of claims filed by single-family homeowners are due to natural causes, such as wind or fire.

However, with most HO-3 policies there are gaps in coverage when loss of personal property is involved. Unless otherwise specified, most insurance companies will pay only the present cash value of destroyed property, not the replacement cost.

For example, an owner who loses a television set purchased three years ago for $600 may only receive $300 or $400 because of depreciation.

REPLACEMENT COST. Robert Schultz, president of the Illinois Insurance Information Service in Chicago, recommends that "homeowners pay extra for replacement costs' coverage to ensure against depreciation." This coverage will boost your premium by 10 percent to 15 percent.

Many homeowners assume their standard insurance policy covers theft of all personal property. However, there are dollar limits on many specific items. Standard coverage on theft of jewelry, watches and furs is often limited to $1,000. However, many policies allow you to increase coverage for an additional fee of about $25 per item.

While it costs more to fully insure your home and possessions, there are some cost-saving steps you can take.

HIGHER DEDUCTIBLE. A higher deductible will keep your insurance costs down, but still give you the protection you need for the big losses.

"If you increase your deductible from $100 to $500, you'll save about 30 percent on your annual premium," said Robert Hunter, an actuary and president of the non-profit National Insurance Consumer Organization, based in Alexandria, Virginia.

Most insurance companies require owners to insure their homes for at least 80 percent of their replacement value. If you are insured for less, you may get paid proportionately less on small losses.

"Lowering coverage limits isn't a good way to save on your insurance," said Mike Walsh, actuarial director for Metropolitan Property & Liability Insurance Co., in Warwick, R.I. "You're better off insuring your house for 100 percent of replacement cost to protect yourself against a financial disaster."

HO-3 vs. HO-5. Karanick suggests that an HO-5 (all risks) policy, which includes replacement-cost coverage, is the best protection the insurance industry has to offer. However, this policy is usually set at a 15 percent higher premium than standard HO-3 (named peril) policies.

Many insurance companies offer an "enhanced" version of the HO-3, which increases coverage on personal property and the replacement cost of the home and its contents. The increase in your annual premium can run anywhere from 1 percent to 20 percent. "This is the most popular policy on the market today," Walsh said.

UNDERINSURANCE is a particular problem with vintage homes, which often contain one-of-a-kind features. Replacement costs for these materials can be prohibitive, but Karanick explained you can build safeguards into most standard insurance policies.

Insurance companies provide expert appraisals, so you can insure your home and its irreplacable contents for a larger amount than you paid depending on the evaluation of its replacement value.

DISCOUNTS ON PREMIUMS. Insurance companies also may offer discounts on your premiums, ranging from 2 percent to 15 percent, for safety devices, such as smoke detectors, burglar alarms and bolt locks.

MAJOR DISASTERS, such as floods or earthquakes, are not covered under a standard homeowner's policy. However, insurance companies are required to offer earthquake coverage in designated areas, and residents in flood-prone areas must seek government-backed insurance coverage.

The National Flood Insurance Program (NFIP) is a way for homeowners to receive flood coverage at a reasonable cost. The maximum insurance coverage is $185,000 for the structure and $60,000 for the home's contents. The average annual premium is $260.

But you don't have to live in a designated flood area to receive this insurance. Ellen Baras, spokesperson for the NFIP in Washington, D.C., said,"approximately one-third of all claims received by the NFIP occur in areas of minimal or moderate flood-designated areas."

Interested homeowners may check their city, village or county office to find out whether their community participates in the NFIP program. They also may ask their insurance agent, or call the NFIP toll-free at 1-800-638-6620.

Reader questions will be answered and may appear in this column, when mailed to Gary S. Meyers at 20 West Hubbard St., Chicago, IL 60610.