If your home is under-insured (not insured for its full replacement value) at the time of a claim, you may be subject to a reduction in your claim payout or denial of your claim. If you have a mortgage, this may leave you with a damaged or unlivable home that you still have to make mortgage payments on. Being properly insured is serious business.
Legally, your home should be insured for its full replacement value. This is the amount that it would cost to rebuild your home today, including labor, materials, contractor overhead and debris removal. The replacement value of your home is distinctly different from the market value (what the home could sell for) or the actual cash value (replacement value minus depreciation).
To protect yourself, always ask your agent to provide a copy of the Replacement Cost Estimator, showing how he calculated the replacement value of your home. If there are errors (wrong square footage, incorrect construction type) or omissions (bathrooms, porches, pools, garages not listed), ask questions and consider talking to another agent.
Insurance is something we need but hope never to use. Is a $200 per year savings in premium worth it if your policy won't pay out when you need it?