Understanding the Types of Homeowners Insurance

Last updated July 5, 2023
Read time: 2 min

While home insurance is a valuable protection for all homeowners, not all policies are created equal. There are different types of home insurance available, with different types of coverage. To choose the best home insurance policy for your personal situation and specific needs, it’s important to understand the various coverage types available.

In this article, we’ll explore different home insurance policy types, what home insurance covers, and what factors you should consider when choosing a home insurance policy.

What is home insurance?

Home insurance is a policy that protects the structure of your home, your personal belongings, and your financial responsibilities for third-party liability claims. In the event of a covered loss, such as a house fire or break-in, your home insurance policy provides a settlement that can be used to repair or rebuild your home and replace personal items.

Homeowners insurance provides comprehensive protection for many of the losses that you might face as a homeowner. However, most policies have exclusions. For example, flooding and earthquakes are typically not covered by homeowners insurance. To fill the gaps in coverage, most insurance companies sell optional policies that can supply extra protection.

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What are the main types of home insurance?

There are several different types of home insurance available. The main types of home insurance are HO-1, HO-2, and HO-3 policies. Here’s a breakdown of these policy types and what is included under each one:

HO-1: An HO-1 policy is the most basic form of home insurance. It covers damages to the structure of your home in the event of damage from named perils, which are explicitly listed in the policy. It does not cover your personal property or liabilities. Because of the limited coverage, this policy is not commonly sold, and many mortgage lenders won’t accept it.
HO-2: An HO-2 policy covers your dwelling and personal property against the named perils outlined in your policy. It also covers your personal liabilities in most cases.
HO-3: An HO-3 policy is the most common type of home insurance. It covers your dwelling against all perils, except for the ones specifically excluded in your policy. HO-3 insurance also covers your personal property on a named-perils basis and includes personal liability, medical payments, and loss of use insurance.
HO-5: An HO-5 policy provides the broadest coverage and is generally more expensive than an HO-3 policy. It covers both your dwelling and personal property from all perils, except for the losses that are excluded from your policy. It also includes personal liability insurance, medical payments insurance, and loss of use insurance.
HO-8: An HO-8 policy is designed for homes that are 40 years or older. This policy covers fewer perils and has lower dwelling coverage limits.

Basic types of home insurance

Standard home insurance policies, like HO-3 and HO-5 policies, include a variety of coverage types. Here are the coverages that are included with the most common homeowners insurance policies:

Dwelling insurance: Dwelling insurance covers the structure of your home if it gets damaged or destroyed in a covered peril, such as a fire, hurricane, or hailstorm. Most policies also cover detached structures, like a gazebo or separate garage.
Personal property insurance: Personal property insurance covers your personal belongings if they get stolen or destroyed in a covered event. It covers things like furniture, electronics, clothing, yard equipment, and small appliances.
Personal liability insurance: Personal liability insurance protects you from the legal and financial consequences of third-party bodily injury and property damage liability claims. Most policies also cover damage caused by a pet.
Medical payments insurance: Medical payments insurance covers the medical expenses of a guest that gets injured on your property. This coverage can apply even if you were not responsible for their injuries.
Loss of use insurance: Loss of use insurance covers your living expenses if you’re not able to live in your house due to an insured event, like a fire. It will cover things like hotels, restaurant bills, parking, and laundry.

Factors to consider when choosing home insurance

When selecting a home insurance policy, there are several important factors to consider. Here are the things you should keep in mind as you shop for a policy.

Property location and risk factors

It’s important to consider the location of your property and its unique risk factors before choosing your home insurance policy. For example, damage from floods and earthquakes are not included under most home insurance policies. So, if you live in an area that has a high risk of these events, consider purchasing separate flood and earthquake insurance.

Also, consider how many valuables you keep in your home. Personal property insurance typically has a low limit on expensive items. If you want full coverage for your valuables, like jewelry or art, consider adding scheduled personal property coverage to your policy.

Coverage limits and deductibles

All home insurance policies have coverage limits, which is the maximum amount of money your insurer will pay out in the event of a claim. Make sure to choose coverage limits that will sufficiently protect your home, personal items, and personal liability. Coverage limits that don’t adequately protect your property can put you at risk financially, even in an insured event.

Also consider that some insurance types, like dwelling and personal property insurance, have deductibles. A deductible is the amount you pay out of pocket for a covered loss. Opting for higher deductibles can lower your monthly premium, but it means you will receive less money if you need to file a claim.

Additional endorsements

In addition to the standard coverage options, most home insurance companies offer endorsements that can be added to your policy, like water backup coverage and identity theft coverage. These endorsements help fill gaps in your policy and address specific needs you may have as a homeowner.

Insurance provider reputation and customer service

As you’re comparing home insurance providers, look for companies that have good ratings from reputable organizations. For example, AM Best rates insurers based on financial stability, and J.D. Power scores companies based on customer and claim satisfaction. Reading customer reviews on platforms such as the Better Business Bureau (BBB) or Trustpilot can also give you a better idea of their performance and what current customers like and don’t like about the provider.

Cost

The cost of home insurance depends on a variety of factors, including your location, coverage limits, age of your home, deductibles, safety equipment in your home, and more. Additionally, every insurance company charges a different rate for coverage. It can be helpful to get quotes from several companies to see which one can offer you the lowest rate. You can take our short quiz to see how much you can expect to pay for homeowners insurance.

FAQs

What are the three types of homeowners insurance?

The three main types of homeowners insurance are HO-2, HO-3, and HO-5 policies. An HO-3 policy is the most common type of home insurance, whereas an HO-5 policy provides the most extensive coverage. HO-5 policies also tend to have the most expensive premiums

What is the difference between HO1 and HO3?

There are several key differences between an HO-1 and HO-3 policy. An HO-1 policy includes named perils coverage for your dwelling, whereas an HO-3 policy includes open perils coverage for your dwelling. Additionally, an HO-1 policy doesn’t provide any coverage for your personal property or personal liabilities, which HO-3 insurance does.

What is the difference between HO2 and HO3?

An HO-2 policy includes named perils coverage for your dwelling and personal property. On the other hand, an HO-3 policy includes open perils coverage for your dwelling and named perils coverage for your personal property. HO-3 policies are typically more expensive than HO-2 policies.

How much homeowners insurance do I need?

The amount of homeowners insurance you need depends on a variety of factors. It’s recommended that you have enough dwelling insurance to cover the cost of rebuilding your home back to its original condition, and enough personal property insurance to cover the full value of your personal items. Your liability coverage limits should be based on your personal assets and the unique risks at your home, like whether you have a pool or entertain guests often.

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