Nowadays, having high-quality homeowners insurance is more a matter of necessity than preference – if not for the solace and peace of mind that a comprehensive home insurance policy brings to you and your loved ones, then for the efficacy of your mortgage application and all that comes with. Home insurance is available in various shapes and sizes, so the first step to buying a good policy is understanding the options you can choose from.
In this article, I plan to walk you through different home insurance options so that you can identify which one works best for your particular situation. I’ll also have a look at standard homeowners insurance coverage levels and the sixteen perils most policies protect against.
Understanding the Difference Between Home Insurance Policy Types and Coverages
While these terms are often used interchangeably to describe insurance policies, there’s more to it when it comes to the subject at hand, and it’s important that we establish this from the get-go. When shopping for home insurance, you can choose between several policy types named after the forms carriers use when issuing (for example, HO-3 or HO-5). Each policy type protects against specific perils and includes different coverage options, such as dwelling or personal liability insurance.
The Sixteen Named Perils
As you know, insurance is designed to protect you against unfortunate, unexpected events. Homeowners insurance policies refer to these happenings as perils. You should be able to count on your policy to protect against the following named perils:
- Fire or lightning
- Windstorm or hail
- Falling objects
- Weight of ice, snow, or sleet
- Accidental discharge or overflow of water or steam
- Sudden and accidental tearing, cracking, burning, or bulging
- Sudden and accidental damage caused by short-circuiting
- Volcanic activity
Some policies, called named perils policies, protect against several or all of the events mentioned above, while others, commonly referred to as broad coverage or open perils policies, protect against any occurrences that are not specifically excluded from the contract.
The Different Types of Homeowners Insurance
Homeowners insurance policy forms are classified based on two main criteria: property type and range of protection. Depending on homeownership status and coverage preference, you can choose from the following types of home insurance policies.
Note that each policy should include some form of dwelling coverage (protection for the actual structure of your home and of attached units), contents or personal property coverage (protection for your personal belongings), and personal liability coverage (protection against bodily injury or property damage to other people or their stuff, as a result of your actions, at your home, and anywhere else).
The most basic form of homeowners insurance, the HO-1, is a named perils policy that only covers 10 of the 16 previously listed events. Due to its limited coverage, we usually advise clients to opt for a different option, such as an HO-3 or HO-5. Nonetheless, you can trust that this policy will insure against events such as fire and lightning, hail, windstorms, theft, and vandalism.
The HO-2 is a broader policy that provides dwelling and contents coverage, with added liability insurance in specific circumstances. Unlike an HO-1, you should be able to count on this policy to insure against all 16 named perils.
By far the most common type of homeowners insurance, this policy protects your home’s dwelling and contents while also covering personal liability, medical payments, and additional living expenses. A hybrid of sorts, the HO-3 offers open perils coverage for the structure of your home and named perils protection for your personal belongings. However, specific events can be excluded from your dwelling coverage – if you live in areas prone to flooding or earthquakes you should talk to your insurance agent about how to best optimize your protection, as such occurrences don’t usually fall within the scope of standard home insurance policies.
An HO-4 is ideal for renters. It offers personal belongings and liability coverage, with dwelling insurance falling within the responsibility of your landlord. Most HO-4 forms are named perils policies. Talk to your insurance agent about spicing up your policy with some additional living expenses coverage, just in case.
The HO-5 is ideal for families with valuable possessions, as it has higher limits for expensive items. As with an HO-3 policy, you can rest assured knowing that your coverage includes the dwelling, contents, personal liability, additional living expenses, and medical payments coverage. However, unlike the HO-3, an HO-5 provides protection under an open perils policy form for both the home structure and personal belongings, so unless specifically excluded, most events fall within its scope. Notable exclusions can include earth movement, mold, nuclear hazards, and water damage from floods or sewer backup, and intentional loss (obviously).
HO-6 insurance policies are specifically designed for condo owners. This insurance will cover whatever is inside your unit, along with additional living expenses and personal liability. Dwelling coverage is usually available by endorsement, as some condo owners are responsible for the interior walls of their units. As with the other policy forms, make sure to discuss your situation with your independent insurance agent.
If you’re the proud owner of an RV or mobile home, look no further than an HO-7 policy for your insurance needs. It will protect your home’s structure, personal belongings, liability, medical payments, and additional living expenses. The exterior of your home will be insured under an open perils policy and your contents under a named perils one.
HO-8 policies tend to the special needs of older homes and dwellings that are historically significant. If you suspect that the costs of repairing your home would be particularly high due to its age, then this type of insurance may solve your problems. HO-8 insurance is a named perils policy that insures your dwelling, personal property, personal liability, additional living expenses, and medical payments.
Homeowners Insurance Loss Settlement Options
In terms of payout, you can choose between actual cash value, replacement cost, or extended replacement cost policies. As with auto insurance, ACV and replacement cost are pretty straightforward – ACV accounts for depreciation when reimbursing, while replacement cost does not. Extended replacement cost, however, is the gold standard of homeowners insurance, as it pays to reinstate your home to the condition it was in prior to the insured event, regardless of cost. If needed, it can offer a payout that can be up to 20 or 25% greater than the listed dwelling limit. Naturally, extended replacement cost policies are more expensive than their ACV or replacement cost counterparts, but the superior level of protection they provide fully makes up for the extra expense.
Choose the Policy That Makes the Most Sense for You
Now that you know your options, it’s time to get in touch with an insurance broker you can trust and see how you can find the most suitable homeowners insurance policy for you and your loved ones. I’m always just one email away, so feel free to get in touch for personalized insurance counseling and the best quotes that Franklin, TN has to offer.