How to work out how much home and contents insurance you need

If you've worked hard to buy your home and all the possessions that go inside it, you really don't want to see that hard work all go up in smoke if disaster strikes!

That's why insuring your home and contents is a must.

There are basically two elements of home insurance - building and contents. You'll need building insurance only if you own your own home - renters need only contents insurance.

Building insurance generally covers the actual home as well as any other buildings on the property such as your garage or garden shed.

The trickiest part is determining how much insurance you need. There are a few online calculators that can help, such as the one at qbe.com.au.

You need to factor in extras such as demolition, removal of debris and architect fees - which are probably an extra 10 percent to 20 percent.

If you're not confident estimating an amount then look for a total replacement policy offered by companies such as AAMI and CommInsure.

You'll be covered for rebuilding your house without a limit. Other insurers, such as GIO, RACT and Suncorp, offer extended replacement policies - meaning they'll pay an additional 25 percent to 30 percent above the sum insured.

The second component is contents insurance. If you were to pick up your home, turn it upside down and shake it, everything that would fall out forms part of your contents insurance.

That not only includes big ticket items - plasmas and stereos - but basics such as manchester and cutlery.

Working out a sum to cover your contents is relatively straightforward. It's a matter of walking around the house and making a list. Taking photos or videos is a good idea because it can help you prove you own the items.

Also make sure you keep receipts or valuations in a safe place. And make sure you update your sum insured regularly - although chances are your insurer will do it for you at renewal time. Most increase the amount by the CPI, but if you have made any big purchases that might not be enough.

It's very important to be aware that most insurers have limits on how much they'll pay on certain items. For example, jewellery may be limited to $1000 in total so even if $5000 worth of jewellery goes missing you'll be paid only $1000. Items that generally have limits include watches, works of art, rugs, furs and collections of any kind.

To combat this you can generally list these on your policy as "specified contents". You'll need to provide a receipt or current valuation and it will probably mean a more expensive premium, but at least you can be sure all your valuables are covered.

Make sure the policy offers new for old replacement - most policies these days do. This means even if your TV was a few years old it will be replaced with a current model. Indemnity policies, on the other hand, take into account age and condition and you may be left out of pocket.

Make sure you find out what is and isn't covered by the policy. Generally cover includes fire or explosion, lightning, storm, earthquakes, malicious acts, theft, water damage and some accidental breakage. A common exclusion is flood.

If you live in a flood-prone area it's important to seek out a policy that includes flood cover as not all insurers offer this.

It's also worth finding out what "extras" are included for no additional cost. This could be spoilage of food, cost of temporary accommodation while your house is being repaired, cover for visitors' contents, cover for contents in storage or at two sites while you are moving, and "open air" contents in the backyard.

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