Owning and maintaining a home is one of the largest financial responsibilities in most people’s lives.
When you buy a home, you get to decide what colors to paint the walls, you can build a deck, and ultimately have your own piece of real estate for generations to come.
Homeowner’s insurance is an essential investment for most people because it provides financial relief for a variety of property damage and personal liability costs.
If you have a mortgage, your lender most likely requires you to have homeowner’s insurance . Even if you do not have a mortgage, it is usually in your best financial interests to have coverage in case anything happens to your property.
Homeowners Insurance
Homeowner’s insurance operates like many other insurance policies because you can choose how much coverage you want, how much your deductible will be, and set liability limits.
While many people think that homeowner’s insurance is only useful for catastrophic property damage, these policies have many more benefits, including liability coverage caused by accidents, temporary living expenses, and more.
Policy Classifications
Although there are many different home insurance providers on the market, only a few types of homeowner insurance policies represent over 90% of all insured homes.
- HO-3
This is the most popular form of homeowner’s insurance policy, and it accounts for 80% of owner-occupied insured homes. Also known as “special form” coverage, most lenders will require this level of coverage at a minimum.
HO-3 policies cover damages caused by most common perils, including fire, lightning, smoke, vandalism, theft, power surges, and more.
If you have an HO-3 policy that excludes certain perils, you have the option to purchase additional coverage if you need it.
- HO-5
This is the most comprehensive coverage, and homes that meet the criteria for HO-5 policies are often newer homes in low-risk areas. These policies will payout and cover any damage caused to your property, with the only exceptions being named in the policy document.
If you are interested in an HO-5 policy, you may need to search for a specialty insurance provider because not all insurance companies offer HO-5 coverage.
- HO-1 & HO-2
Both HO-1 and HO-2 policies are known as limited coverage homeowner’s policies, and they are not very common. HO-2 coverage only pays for specified losses outlined in the policy and usually only covers damage to your home and possessions.
HO-1 covers even fewer losses than HO-2 policies and is the bare minimum for home insurance. Since HO-1 coverage barely covers any losses, it is not very common and may not be a good option for most homeowners.
- Other Forms
Aside from the main policy types, there are some other niche coverage lines such as HO-4, which is renter’s insurance; HO-6 for condominium coverage, HO-7 which is for mobile homes; and HO-8 for much older homes.
General Coverage
Most homeowner’s policies have six major coverage lines:
- Dwelling – Covers damage to your home and structures that are directly attached, such as a deck or porch.
- Personal Property – Reimburses for damaged and stolen belongings.
- Additional Structures – Covers damage caused to structures that are not directly attached to the home, such as a shed or gazebo.
- Liability – Pays for expenses caused by someone being injured on your property or cause property damage.
- Additional Living – If your home is rendered unlivable and needs repairs, this will pay for temporary living expenses.
- Medical Payments – If someone incurs an injury on your property, this will pay for medical expenses, regardless of fault.
Coverage for homeowner’s insurance policies revolves around the home’s value. The dwelling coverage pays for the cost of rebuilding the entire home, and the other lines are usually relative to that number. For example, personal property coverage may range from 50%-60% of the dwelling coverage.
Common Exclusions
Although homeowner’s insurance policies cover a wide array of damage and liability costs, there are notable exclusions that you should be aware of if you’re shopping for a new policy.
Most policies exclude flood damage caused by a natural disaster and plumbing issues. Since certain geographic regions are more flood-prone than others, purchasing additional flood coverage may be wise if you live in those areas.
Other exclusions generally include earthquakes and landslides, which have their own coverage lines, infestations, and normal wear and tear.
Homeowner’s policies also exclude damage caused intentionally by the homeowner because that would be fraudulent abuse of the policy.
Final Thoughts
If you are considering a new homeowner’s policy, then you should take some time to identify how much your property is worth and take an inventory of your belongings.
Taking an accurate inventory can save time and ensure that you are fully reimbursed if your home and property are damaged.
Additionally, if you would like to learn more about homeowner’s insurance and find some of the best insurance providers on the market, be sure to check out our other reviews and guides!
* This content is not provided by the financial institution or the offer’s provider. Any opinions, analyses, reviews or recommendations expressed here are those of the author’s alone, and does not constitute a financial or expert advice.
