Your home is probably the most expensive part of your family's budget. The loss of part or all of your home and its contents could cause serious financial problems. You need to be protected against:

• Fire, windstorms, hail, and other natural disasters (perils)

• Theft of personal property

• Claims made against you or members of your family for injury or damage (liability coverage)

There are four general types of homeowner policies, depending upon the losses they cover: basic, broad, special, and comprehensive. Insurance companies often offer all four types but will also use other terms to describe the policy.

The home insurance you need has little to do with your home's market value. Coverage is based on the cost of replacing the entire structure, with personal property figured as a percentage of that cost, typically 50 to 75 percent of actual cash value; replacement value is available at an additional cost.

A basic policy (HO-1) protects against:

• damage to your dwelling, to other structures on your property, and to personal property and dwelling contents at home or away.

• situations where you are legally liable for losses to someone else.

Homeowners' liability protection covers individuals injured on your property, your damage to someone else's property, and medical payment for the injured. You are protected if you are sued for damages arising from negligence caused by you, your family members, or your pets. The liability does not cover any liability resulting from the use of an automobile.

Liability protection is a fixed dollar amount, usually starting at $100,000. For a small additional payment the amount can be doubled or tripled. For example, if you were sued for damages and the jury awards more than the amount for which you are insured, you must pay the difference.

Homeowner policies also cover medical expenses for accidents occurring on your property. Basic policies usually limit coverage to $1,000 per person, but greater coverage can be purchased.

A renter's policy (HO-4) covers possessions against loss but does not cover the building in which you live. Like a homeowner's policy, it includes liability protection. Policies are also available for those who own condominiums and mobile homes (HO-6).

Most homeowner's and renter's policies cover the liability for theft of credit, debit, and EFT cards, subject to your deductible.

Insurance premiums are based on the replacement value, not the market value, of your property. Your policy will specify that it is either an actual cash value or replacement value policy. If you are insured for actual cash value, you will be covered for the replacement cost of items, minus a wear-and-tear factor that can be quite high. Insurance companies have a listing of normal household goods and a set "life expectancy" for each item. For example, under a standard replacement value policy, if your ten-year-old television is stolen, and your insurance only pays what the television set is now worth, you will receive nothing, because the normal life expectancy for a television is ten years.

A replacement value policy will cover your possessions for the full amount it will take to replace the lost or damaged items. Check your policy to be sure that it will rebuild your house and replace your possessions at today's prices. For the best protection, coverage should be based on replacement cost rather than actual cash value. Full replacement value insurance is only a few dollars more per year than actual cash value insurance.

Don't sacrifice important coverage just to cut costs, as you may be risking a lot for a small additional premium. Your coverage should be for at least 80 percent of replacement cost or you are not fully protected, even for a partial loss. If you try to save money by lowering premium costs, you may be underinsured. You are better off having adequate coverage and increasing your deductible (the amount you must pay toward the loss before the insurance company pays) to reduce premiums. If you have smoke alarms, fire extinguishers, and radon detectors in your home, not only will you increase your safety, but you may also qualify for a lower premium. Many homeowner's policies have a clause that automatically raises the policy coverage each year to keep up with inflation.

If you have special or expensive items such as jewelry, silver, furs, antiques or unusual collections, check with your agent to be sure that they are covered by your policy. You may have to add a floater or endorsement to the policy to cover them for full replacement value. It's less expensive to add a floater than to take out another policy. Usually there are strict limits on coverage for certain items such as money, coins, silver, and oriental rugs.

You will also want to make a written plus a photographic (or video) inventory of all your belongings and update it on a yearly basis. This record will help you estimate the value of your personal and household property to determine if your coverage is adequate. It will be invaluable if you have a loss and will help you verify the item and its value. The inventory is also useful when you determine your net worth. Sales slips and appraisal certificates also help prove value. Keep one copy of your inventory at home and another in a safe place such as a safe deposit box or with a trusted friend. Do not keep the record at the insurance office (for privacy reasons).