It is recommended to insure your home insurance properly, the insurance company fully repairs or replaces your home if it is damaged or destroyed by a covered cause of loss such as a fire, flood, or whatever your policy happens to cover.

For home insurance that insured for less than its full replacement cost, you need to be aware of two possible claims penalties:

The calculation for the under-insured penalty occurs if you are under-insured for a total loss. Say your home which you bought seven years ago and insured for $200,000 burns and nothing left. The cost to rebuild that house in today's market is $300,000. Because you insured the house for $250,000, you suffer an out-of-pocket loss of $50,000.

Another consequence of penalty for under-insurance occurs when your home is partially damaged. Say the purchased a two-story home for $500,000 a decade ago. You insure it for $400,000. If you want to build this home new today, it would cost you $700,000. Let us assume that you have a bathroom and kitchen fire with extensive smoke and water damage, and that the total cost to repair your home is $150,000. Your insurance company pays you $100,000. You are out $50,000! Reason for this is because the vast majority of homeowner's policies will only pay the full cost to replace partial damage to your home if you insure your home for at least 80 percent or more of the cost to rebuild new. If you insure your home for less than 80 percent of the home's full replacement cost, your claim settlement will be depreciated.

If, on the other hand, you insure your home for its cost to build new or at least 80 percent of that value, the insurance company settles your claim for the full replacement cost of the damage, depends on your policy limit.