There are two types of home insurance: buildings cover, which is a condition of a loan being granted by a mortgage lender, and contents cover, which is optional. They can be bought separately, but it is often more convenient and cost-effective to take them under one policy.

Shopping around for the most appropriate policy can save you hundreds of pounds a year. There are countless companies on the high street and the Internet, offering cover at competitive rates. – To help find the right insurance policy for you, our list of Home Insurance sites (www.uknetguide.co.uk/Finance/Insurance/Home_Insurance.html) provides links to the leading insurance companies and brokers in the UK.

It is also a good idea to contact an insurance company directly as it is generally cheaper than arranging a policy through an agent, such as a bank or building society, which charges a commission from the lender.

Buildings Insurance

This covers the structure of your home, as well as permanent fixtures such toilets, baths, basins and fitted kitchens. Garden sheds, greenhouses and garages are usually covered, too – as are driveways, boundary walls and fences, paths and gates.

Your mortgage lender will insist you take out this form of cover and might try to sell you a policy, although you’re not obliged to buy from them. Compare their quote with those of other companies.

If you own a flat, your freeholder will probably arrange the buildings insurance, and if your home is rented - either privately or from the council - the owner will arrange the cover.

Most schemes pay following a stated list of risks ranging from flood, fire and subsidence, to damage caused by theft, storms and vandalism. In addition, accidental damage to underground pipes and cables, glass in doors, windows and bathroom furniture are usually covered. DIY mishaps may or may not be covered. Check your policy before embarking on any handy work, even if you are extremely skilled.

There will be exclusions. Typically, these are storm damage to gates and fences, frost damage, and structural damage caused by aircraft’s sonic booms.

The amount of cover will be equivalent to the cost of rebuilding your home. This is called the ‘sum insured’. It is the most your insurer will pay out, even if your house is reduced to ashes, and it may be higher or lower than the property’s market value. It is possible to calculate your own sum insured, but it’s also very complicated. A chartered surveyor will be able to prepare a professional rebuilding cost assessment.

However, some insurance companies offer unlimited cover, while other providers offer premiums based on a simple assessment of where you live and the type, size and age of your property. Premiums will be higher if you live in an area prone to subsidence.

With most policies there will be an excess, typically between £50 and £100, which you will have to meet on any claim. Most insurers will keep your policy up to date by index-linking your sum insured to take into account changes in rebuilding costs. Check that your provider does this - and inform your insurer if you improve your home, for example, by building an extension.

Contents Insurance

Most policies will cover you for fire, flood or water damage, vandalism and theft of all household possessions you would take with you when you move home – including computers, TVs and videos, stereo equipment, furniture, clothing and CDs – usually up to a stated limit. Accidental damage is sometimes covered, and sometimes not.

Items that are frequently taken out of the home, such as cameras and sports equipment, are usually covered by general polices. Some will also pay out if you accidentally damage another person’s property. Many insurers will pay for replacement door locks if you lose your house keys.

Flexible policies offered by a number of insurance companies will increase the level of cover during Christmas to account for the gifts in the house, while other providers will boost cover for newly weds for the same reason.

The sum insured is the most your insurer will pay if your possessions are stolen or destroyed, and it helps determine your premiums – so it’s vital that you calculate the amount accurately. Go from room to room, including your garage, cellar, loft/attic and garden shed, and write down what it would cost to replace the items in each room. Add up all the figures and the total will be a very good estimate of how much cover you’ll need.

There are two types of policy from which to choose: new-for-old and wear-and-tear. The former is also sometimes known as ‘replacement as new’ cover and meets the full cost of replacing items. Most items, apart from clothing and household linen, can be insured on this basis.

Wear-and-tear policies, or indemnity cover, pay to replace or repair your possessions, but with an appropriate reduction for depreciation. Premiums are smaller than for equivalent new-for-old policies because claims are smaller.

Most policies impose limits on the value of precious items like jewellery, works of art and ornaments – which are best insured separately.