A Suze Orman exclusive

If you haven't upgraded your home insurance policy in the past few years you could be dangerously underinsured. That's because you need to be certain that your policy is keeping up with the rising cost of replacing your home.

What you need to insure is not the current value of your home, but the cost to rebuild if it were destroyed. And given the sharp rise in building costs, you could be looking at a wide difference between the two. Let’s say your policy is for $300,000, which is what you paid for the home a few years ago. But with rising home values and rising building costs you would be looking at a $450,000 tab if you needed to completely replace the house. Your insurer isn’t going to fork over the $450,000. In fact, you’ll be lucky to get 125 percent of the insured value, or $375,000 in this example.

So you need to work with your insurer to make sure you have adequate replacement cost coverage tied to rebuilding costs. Also, look for a policy that has an automatic inflation adjustment, so your coverage will increase each year to reflect rising home and homebuilding costs.

Renters also need coverage. Not for the actual property, but for everything you want to protect inside the home. With a renters policy, make sure again to get actual replacement cost coverage. Do not settle for a policy that will pay you just the depreciated value of a possession. For example, let’s say you shelled out $3,000 for a plasma TV. If it’s stolen, you want your insurance policy payout to cover the cost of buying a new plasma TV at the going market rate. What you don’t want is to be told the depreciated value of that TV was $1,500 and that’s all you’re going to get.

For both homeowners and renters insurance, you should also ask the insurer to include an umbrella liability policy with your coverage. For about $200 a year, you get $1 million in liability protection. That’s nice to have if you are ever sued over an accident on the property you own or rent, and the coverage applies to auto accident claims too.