A home can be many things.
From a sanctuary of solitude to a gathering place for family and friends, our homes hold many of the things we cherish most. They also represent a large piece of our financial future and are possibly the most significant asset many of us will ever possess.
So, it shouldn’t come as an afterthought to protect your home and all it represents to the best of your ability.
This article discusses the importance of finding the right insurance and the eight types of home insurance. With some background knowledge, you will feel more informed about home insurance and able to determine what works best for you.
Do I Have to Buy Home Insurance?
While no law states that you must purchase home insurance, it is crucial to consider the potential impact not having insurance may have on your future. It is also a requirement by many mortgage lenders to have a homeowner’s insurance plan in place before they will lend you money. If you recently purchased a home, you want to learn as much as you can about the different types of home insurance to determine what you need.
With home insurance, you provide a financial safety net for your largest asset in case of an unforeseen tragedy like total property loss. It can also protect a homeowner from liability over legal action taken by a person injured on their property.
What Does Home Insurance Cover?
According to the NAIC, all homeowner’s insurance covers the home’s structure, including attached structures, fixtures, and built-in appliances. Homeowners often purchase additional insurance that meets their needs based on what they discuss with their provider. Because every home is different, there is no one-size-fits-all regarding the type of home insurance you should buy.
Some types of coverage to consider when looking for the right home insurance plan include the following:
- Dwelling coverage – Covers damage to your home and any attached structures.
- Other Structures – Covers damage to unattached structures such as sheds.
- Personal Property – Covers damaged or lost personal items like furniture or electronics.
Loss of use – Covers additional living expenses during reconstruction.
- Personal Liability – Covers financial losses from property damage and medical payments for individuals hurt on a homeowner’s property or by the homeowner’s pets.
- Personal Umbrella Liability – Covers losses beyond the policy limits.
When reading an explanation of the benefits of a policy, it is helpful to know the difference between “Named Peril” and “Open Peril.”
Named Peril refers to a list of events or hazards (perils) specifically covered by the insurance policy. The policy does not cover any perils that are not on the list.
Open Peril refers to a list of events or hazards (perils) not covered by an insurance policy. If a peril is NOT listed as an exclusion, the policy covers it.
The 8 Types of Home Insurance
Because every home is different, there are multiple home insurance options. Depending on the type of home and its coverage needs, it will likely fall under a HO-1, HO-2, HO-3, HO-4, HO-5, HO-6, HO-7, or HO-8 insurance policy. Each type of policy addresses a different set of circumstances. Let’s break each of them down.
This type of insurance policy, also called basic form homeowner’s insurance, provides the most basic coverage out of the different kinds of home insurance, strictly covering damages resulting from ten perils.
These perils include the following:
- Fire or lightning
- Windstorm or hail
- Riot or civil commotion
- Damage resulting from fallen aircraft
- Damage resulting from vehicle collision
- Smoke damage
- Theft or burglary
- Volcanic eruptions and falling debris
This type of insurance will only cover the home’s structure at cash value. You are not covered for additional living expenses, the full cost to rebuild, personal item replacement, or liability. Because of the limitations of a HO-1 policy, it is not available in many states.
A broad form (HO-2) insurance policy is more common than HO-1 policies, providing more robust coverage for homeowners. The broad form will cover your dwelling at its replacement cost value and your personal property items at cash value. It will also provide personal liability protection and medical payments to others injured on your property.
In addition to the ten perils covered by an HO-1 policy, the HO-2 policy also covers:
- Snow and ice damage
- Accidental overflow of water or steam
- Freezing of plumbing and appliances
- Bulging, swelling, or cracking caused by a sudden or unintentional event
- Falling objects
- Sudden, accidental damage caused by artificially generated electrical current (such as a power surge)
Also known as special form, HO-3 insurance is the most common, as it typically provides adequate coverage for most homeowners. This policy offers open-peril coverage, which will cover your home and personal property (up to the policy limits) from all perils unless listed as an exclusion. It will also cover personal liability and medical expenses.
Some common exclusions from an HO-3 insurance policy include the following:
- Power failure
- Settling, wear and tear
- Damage or theft in an unoccupied home or construction area
- Damage caused by pets or insects
- Government or legal actions due to lack of permits or faulty construction
- Nuclear hazards
- Intentional loss or damage
Also known as renter’s insurance, HO-4 is insurance for people renting a house or apartment. While the landlord is responsible for buying home insurance to cover the structure itself, renter’s insurance will cover a tenant’s belongings as well as additional living expenses and liability.
The 16 perils covered are the same that would apply to personal belongings under an HO-3 plan as well.
Also known as a comprehensive policy, this insurance offers the highest level of coverage for homes and personal property. While it is similar to an HO-3 policy, an HO-5 will cover the replacement cost of your dwelling AND belongings. Like an HO-3, all perils are covered unless listed as an exclusion. While it is ideal for new construction projects, HO-5 insurance is not offered by all insurance companies.
“Walls-in coverage,” or HO-4, is for those who live in a condo or co-op. It is essential to understand your association’s policy before you purchase condo insurance to ensure there are no redundancies or gaps in your coverage. Like HO-5 plans, liability and medical expenses of others are covered.
Some items covered by a condo insurance policy include the following:
- Renovations completed after purchase
- Walls, floors, and ceiling
- Personal belongings
- Additional living expenses if your condo is damaged or lost
An HO-7 policy is very similar to an HO-3 policy and is for those who own a mobile, trailer, manufactured, sectional, or modular home. It is typical for policies only to cover the house when it is stationary rather than when it is in transit.
Like HO-3 coverage, it will cover any damage not listed as an exclusion.
HO-8 plans are for historic properties and landmarks. Known as a modified coverage form, this plan is for homes over 40 years old, which would cost more to rebuild than their market value. Under an HO-8 plan, your home and belongings are covered under ten specific perils and are the same perils listed under an HO-1 plan.
Every situation is unique, so you must do your due diligence and research your options before buying a home insurance plan. If you want to protect your assets and personal belongings, talking to an insurance professional is worth the time. Just like buying or selling a home, finding the right insurance should be done with the help of industry professionals who know the area and will help you make the most informed decision.
If you want to buy or sell a home, contact Team North Star to learn how we can work together!