Whether you’re a first-time homeowner or a new parent, homeowners insurance is a worthy investment to protect your home and family from financial adversity.
Though it may seem like an arbitrary requirement only meant for people financing their home through a bank or mortgage lenders, homeowners insurance is essentially meant to protect a homeowner’s most valuable assets against unforeseen damages and losses.
Parenthood and families tend to be the focal point of many home insurance commercials. While a house full of children or pets can be more susceptible to unexpected casualties, sometimes accidents happen outside of human intervention.
Fires, rainstorms, vandalism, and other misfortunes take place without warning, but the right policy coverage can alleviate those financial burdens.
Types of policies
When researching and comparing policies, it’s important to understand the different types available in order to choose the best one for your needs and budget.
You want a home insurance policy that financially covers any perils—things that cause injury, loss, or destruction—that are likely to occur naturally as a result of your geographical location or due to other factors, such as having children or pets in the house.
Listed below are the eight types of homeowner insurance policies and what they cover:
HO-1: Basic Policy
As the name suggests, this type of policy is the most basic and least expensive one. It provides protection solely against the ten standard perils—theft, vandalism, fire and smoke, lightning, hail and windstorms, volcanic eruption, damage from aircrafts, damage from vehicles, riots, and explosions. As the least expensive policy, it also offers the least amount of coverage.
HO-2: Named-Peril Policy
A broader form of the HO-1 policy, this policy provides coverage for the ten standard perils as well as the following: accidental breakage or malfunction of household systems, the weight of snow and ice, overheating or freezing of household systems, accidental damage from artificial electrical current, and accidental water discharge.
HO-3: Special Form Policy
This is the most comprehensive and common form of homeowners insurance policies and is generally affordable. The HO-3 covers everything an HO-2 does, as well as all property—including attached structures, such as a garage—and personal belongings. The HO-3 policy also provides personal liability in case someone is injured on the property. Special Form policies only exclude perils specifically mentioned in the policy.
HO-4: Renter’s Insurance
This policy is specifically tailored to the needs of renters, but it's also a good idea for homeowners to familiarize themselves with in case they ever decide to rent out their home or other residential property in the future.
All personal belongings and personal liability are covered under this policy.
HO-5: Comprehensive Policy
This policy provides coverage for more perils than any other homeowners insurance policy. It is the most popular choice among homeowners, as it offers all of the protection an HO-3 provides, plus coverage for internal structures, personal property (except for items specifically excluded), and personal liability.
Like other policies, the HO-5 also has a list of exclusions, with the most common being earth movement—earthquake, landslides, mudslides—and floods.
The Comprehensive policy is generally the most expensive but offers the most coverage out of all the other policies.
HO-6: Condo and Co-op Insurance
This policy is tailor-made for residents of condominiums and cooperatives, in which the home is connected to or built within a shared property.
The HO-6 provides coverage for the interior of your home—typically walls, floors, and ceilings—as well as personal property and liability. The exterior of the home, such as the roof and yard, is typically covered by the Homeowner’s Association (HOA).
HO-7: Mobile Home Policy
Specifically designed for mobile and manufactured homes, this policy provides the same type of coverage as an HO-3.
HO-8: Older Home Policy
This policy is designed for aging homes that need additional coverage beyond a general policy. Older, historic homes require more maintenance than newer ones, and their replacement costs usually exceed their actual cash value.
Depending on the insurance company, certain homes must meet the age requirements to qualify for this policy.
Basic Types of Coverage
Most home insurance policies cover the same general items unless otherwise specified by the insurer in the policy details.
Here is a breakdown of the five coverage types to look for:
- Dwelling Protection - Protection for damage or loss of the home. This type of coverage is not included in the renter or condo policies, which only cover damages to the interior of the home.
- Other Structures - Coverage for additional structures on the property, such as garages, gazebos, swimming pools, fences, and sheds.
- Personal Belongings - Covers personal property losses not permanently affixed to the home, such as furniture, electronics, appliances, and clothing. Coverage for valuable personal belongings such as jewelry, guns, and artwork vary depending on the policy, most of which only cover their dollar value. For such items, many homeowners opt for endorsement coverage to insure their full value in the event of loss or theft.
- Additional Living Expenses (ALE) - Covers temporary living expenses when displaced from home, such as in hotels and rentals, if the property is too damaged and uninhabitable while being repaired.
- Liability Protection - Entails coverage for injuries or destruction of property caused by you, your family, property, or pets. This includes medical coverage for injuries to a person visiting your home or property.
What's not covered
While shopping around, bear in mind that most homeowner insurance providers set limits and restrictions on what they will cover.
Here are the most common exclusions:
- Floods
- Water Backup
- Earthquakes
- Ordinances
- Mold
- Infestations
Remember, the purpose of insurance is to provide protection from financial loss, and there is no one-size-fits-all situation.
Hurricanes, for example, are generally not covered by homeowners insurance, so claims for flood damage caused by these natural phenomena are likely to be denied. For these reasons, homeowners are encouraged to analyze their needs and those of their family, home, and residential area before making a decision.
It’s also important to thoroughly discuss typically excluded perils with an insurance agent to better understand the policy as well as one's prospective financial obligations.
How to choose a coverage level
As with any type of insurance, it’s essential to take several factors into account, aside from just your budget, to choose the right level of coverage needed.
Step 1: Calculate the replacement value of your home and personal property to help determine the best level of coverage against total losses. A detailed inventory of your personal property may also be useful at this stage, as it could facilitate the claims process later on.
Step 2: Consider options that can add more value to your policy (extended coverage, ordinance or law endorsement, full-value personal property protection).
Step 3: Take into account the climate and natural disasters common in your city and area. Those living in high-risk areas may also want to look into adding separate policies, such as fire, flood, hail, earthquake, hurricane, or umbrella insurance.
Tips to save on Homeowners Insurance
The downside to insurance is the premiums—what you pay out-of-pocket for the policy—which rise every time you experience a loss and file a claim.
Luckily, you can take actions that can help reduce the likelihood of damage to your home. Listed below are steps you can take to reduce your premium costs and secure a more affordable policy:
Learn about your area and the value of your home
- Increase your deductible
- Reduce risks by installing safety features (smoke detectors, a home security system, impact- and fire-resistant materials, storm shutters for doors and windows, etc.)
- Avoid having pools or trampolines
- Shop around and compare quotes from different providers
- Research the insurer’s customer reputation, financial stability, and history of paying claims on time
- Consider bundling homeowners with auto insurance for multi-policy discounts
- Improve your credit-based insurance score
Be sure to check the websites of different homeowners insurance providers to see the types of policies and discounts they offer.
Many of them extend discounts for bundled policies, also known as multi-policy discounts, in which they combine insurance policies like home and auto for a price cheaper than what you would have paid for separate policies.
Other common policy discounts include signing up for automatic monthly payments, being a loyal customer for a certain length of time, and installing a monitored home security system.
And last but not least, make it your mission to ask as many questions as possible. Go over the policy in depth with your insurance agent and make notes of requirements and exclusions that don’t make sense to you.
And if you need any assistance in comparing top choice homeowners insurance companies, we’re here to help.