Cheap home insurance can mean limited coverage for yourself, your family, your house and your other possessions, so before accepting a cheap insurance policy, examine first what it covers and know why your premiums are low.

The adage too-good-to-be-true also applies in home insurance. An insurer cannot sell you a very low-cost policy and at the same time offer you complete coverage. There has to be some provisions in the standard house insurance coverage that were removed or revised so that they can reduce their liability and also reduce your premium.

One of these ways is through your insurance deductible. Your premium may have been reduced by 20 or 25 percent, but your deductible has been raised from $500 to $1,200. The deductible is your share of the cost when something bad happens to your house or a liability arises.

Increasing the deductible is one of the ways to reduce insurance premiums, but if you are not informed beforehand about the deductible increase, then it is a mishandled strategy and reeks of deception.

Another is the cash value or replacement cost coverage option. Your home insurance policy may be cheap because you were given a cash value coverage without you knowing or realizing it.

A cash value coverage means that when you submit a claim, the insurance appraiser will estimate the value of your house at the time of the claim, reduces it by applying the depreciation rate and your deductible. Typically, this option results in much lower claim proceeds because of the depreciation factor.

On the other hand, if you purchased a replacement cost policy, the amount of your claim proceeds will be equal to the exact amount you will spend or you have already spent to replace your property or possessions. This requires submission of receipts and other types of expense documentation. Because this type of coverage provides full compensation, its premium is much higher. So cheap insurance policies are commonly cash value policies.

However, there could be legitimate and valid reasons why you are being offered a cheap house insurance policy. Probably, you were given cheap rates because your house is well-secured and resistant to disasters, your CLUE record is good, you have been patronizing the company for years and your location is not prone to natural disasters.

What is important is you know the list of perils and liabilities covered by your home insurance policy, your deductible amount and the basis to be used when your claims are processed.

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