Typically, an in-law apartment is either attached to or built within your home. Determining how an in-law apartment will affect your homeowners insurance depends largely on your insurance company.

Generally, if the in-law apartment is considered to be a part of your primary dwelling, then your homeowners insurance policy will cover both the apartment structure and its contents. However, if your insurance company considers the apartment to be a separate dwelling, then your homeowners policy will still cover the structure itself but won't cover the contents of the apartment. In this case, the tenant would need to purchase a renters insurance policy to protect the contents of the apartment.

But what criteria does the insurance company use to determine if the apartment is a separate dwelling or a part of your home? That's entirely up to the company. In some cases, the presence of a private entrance marks the apartment as a separate unit. Other insurers are more liberal; the apartment may be considered a separate unit only if it has its own mailing address or utility hookups. Still others base the decision on who resides in the space--if it's a relative, the apartment may be considered part of your home; if not, the apartment is considered a separate dwelling.

Before you frame an outside entrance or install that whirlpool bath or even hire an architect to draw a plan, find out if your local zoning rules allow for in-law apartments. Check with your insurance agent to determine how your addition will be classified. If the apartment will be considered a separate dwelling, make sure the tenant will have renters insurance, even if the tenant's a relative. If the apartment will be considered part of your home, check your policy to make sure it'll cover the additional space and the contents.