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DEDUCT THE VALUE OF YOUR LAND WHEN BUYING HOME INSURANCE

If you're searching for ways to cut costs, review your homeowners insurance policy - especially if you bought replacement coverage based on its appraised or market value.

Buying insurance using the appraised or market value is not smart because that price includes the cost of the land the house sits on.Insurance companies do not insure land - even in coastal areas where land can disappear in a storm overnight.

For example, if the appraised or market value of your house is $120,000, and you buy insurance to cover that amount, but it will only cost $100,000 to rebuild it, the insurance company will only pay $100,000.

That means this homeowner paid about 18 percent more for home insurance than what could actually collected. As a rule of thumb, land is about one-sixth the total appraised value of a home.

The point is: You shouldn't overinsure.

"Being overinsured can be just as bad as being underinsured," said John Pottridge, vice president of government and industry affairs for the National Association of Professional Insurance Agents.

That fact doesn't bother some mortgage lenders, who still require insurance to cover the entire mortgage amount, which includes the land. That could be because borrowers pay the freight of the overinsurance.

Pottridge says some mortgage lenders don't understand that insurance companies do not insure land.

"The lenders that understand that concept . . . will allow the homeowner to deduct the value of the land from the amount of the mortgage in order to insure only their insurable interest," Pottridge said.

However, there are times when the amount of the mortgage will be less than the value of the house, excluding the land. Lenders still only require insurance to cover the mortgage amount.

"It works both ways," Pottridge said.

Homeowners can save money by reducing coverage too.

But before they do this, they should figure out which risks they want covered.

Tornadoes - probably a good idea if they live in the Midwest. Ditto for hurricanes if they live in coastal areas like Florida. Theft - more than likely in today's society.

Water and wind damage - absolutely if they live in one of the flood-prone or wind storm areas - but they will probably have to buy separate policies.

How much is enough?

You can choose to insure 100 percent of your house's replacement cost or some fractional amount.

However, some insurance companies will not insure a house for less than 80 percent of its value, and others require 100 percent for replacement cost - so shop around.

But keep in mind that 80 percent or more coverage means a homeowner will be paid for the entire cost of the partial loss minus deductible.

If you choose to insure less than 80 percent, you're considered underinsured. That means the insurance company will pay only part of the cost of the loss less the deductible and a penalty for underinsurance.

To arrive at a dollar amount of coverage needed, homeowners must determine how much it will cost to replace or rebuild their house from the bottom up at today's construction prices.

An insurance adjuster or local contractor can provide an estimate of that cost taking into consideration price differences in geographic areas and effects of changes in the economy. Lowering deductibles can save homeowners dollars, too.