What’s the most important purchase you’ve ever made in your life? I’m not a mind reader, but I am almost positive that if you’re a homeowner you thought “my house”. Protecting the things that mean the most to us is essential for peace of mind, and that’s why having the right homeowners insurance is a must. Understanding homeowners insurance and the seemingly endless variety of plans on the market is not exactly an appealing task. However, the different types of homeowners insurance can be broken down into several main types.
The first, most basic type of homeowners insurance policy is called HO 1. This category of coverage is considered a named perils policy. Let’s break down exactly “named perils” means. Perils is a synonym for dangers or risks, so a named perils policy means that the homeowners insurance policy specifically names the types of perils that your home is protected against. For example, if you have an HO 1 homeowners insurance policy and a tree smushes your house not as a result of one of the named perils in your policy, you’re not covered. HO 1 policies can protect a home from the most common types of incidents like fire, lightning, wind, etc.
But wait, there’s more! HO 1 coverage can either be a replacement cost policy or an actual cash value policy. With a replacement cost policy, if you paid $10,000 for your windows in 2012 and then in 2016 they were all destroyed in an explosion, the insurance company would pay $10,000 minus your deductible to replace the windows. However, if you have an actual cash value policy, the insurance company would also subtract depreciation from the original $10,000 value of your windows, and therefore would pay the current value of the windows, after 4 years of wear and tear, minus your deductible.
Moving on to a more comprehensive homeowners insurance coverage option, we have an HO 2 type of policy. This type of homeowners insurance is a named perils policy, and it includes all of the lovely perils from its little brother HO 1 as well as some new ones. This type of homeowners insurance includes coverage for dangers that are excluded from an HO 1 policy, such as frozen pipes, damage caused by the weight of snow, building collapse, or burst of water heating systems. This type of plan is normally replacement cost, but it is essential to know for sure if the plan you are buying is replacement cost or actual cash value, because it will make a significant difference in what the insurance company pays in the event of a loss. However, keep in mind that there is no free lunch, and the more comprehensive coverage you have the more you will pay for your homeowners insurance plan.
The most common homeowners insurance coverage is typically a HO 3. This category of insurance coverage is a hybrid of a named perils policy and an open perils policy. With HO 3 type coverage, your home is covered on an open perils basis and your personal belongings, or contents of your home, are covered on a named perils basis. This means that if something happens to the contents of your home that is caused by an event listed as a named peril on your plan, then you are covered, and if it is not listed, you’re on your own. Your home itself, however, is covered by open peril. This means that there is a list of specific events that are excluded from coverage, and if something happens to your home that is not listed as excluded from coverage, then you’re covered. In other words, your home is covered in the event of any loss as long as the cause of that loss is not specifically listed as an exclusion.
HO 4 policies are usually bought by tenants or renters, who do not own the actual structure that they live in, but rather they only own the contents of the interior of structure. Therefore, this policy only covers a person’s personal property, not the dwelling in which they reside. This policy is a named perils type of plan, so again it is important to know in which specific situations your personal properties will be covered.
To mix things up we will jump to insurance type HO 6 which is for owners of condos or townhomes. This type of insurance is similar to homeowners insurance but it involves a significantly less amount of dwelling coverage and coverage of other structures. This is because in most cases a condo owner only owns the interior of the condo and the rest of the structure and property is owned by the condo association. This type of insurance would be a named perils policy, but the hard truth is that if you are a condo or townhome owner it’s your only option. So my advice would be to understand the scope of your coverage like the back of your hand and try to find the best price.
If you live in a charming house with lots of character and many years of history, I hereby dedicate this paragraph to you. What you need is an HO 8 policy, which is specifically for historic homes in which repairs and modern replacements would be extremely costly. These types of policies are generally affordable because they tend to pay very little in the event of a loss. Because of the significantly higher cost of repairing an old home or installations of modern items in historic structures, insurance companies offer an HO 8 policy with a relatively low payout limit.
I hope you were sharp enough to notice that throughout this entire piece of writing I have not mentioned once flood, water damage, or falling objects coverage. Apart from the normal homeowners insurance plan that you purchase, you will most likely have to purchase an additional policy to protect your home from dangers that are most likely to impact your geographical area. For example, if you live in the lowcountry of South Carolina, then flood insurance is a must. If you live in California, get ready to pay for earthquake insurance. All of these types of homeowners insurance policies are add-on coverage that you would purchase as additional protection for your home.
Some final words of wisdom: be sure to fully understand the extent of your coverage. Some policies include dwelling only coverage, some protect your dwelling and your belongings, and some only protect your belongings. Furthermore, some homeowners insurance policies will also cover medical bills for you, your family, and your guests from any physical harm caused by a covered event in your home or on your property. The bottom line is that the more coverage you want for your home and your belongings, the more you will pay in dollars but the more you will gain in peace of mind.
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