Did you know there are 8 types of homeowners insurance? Here are the details on each type of policy, along with what you need to know to make sure your home is protected.
When it comes to homeowners insurance, all too many of us don’t know what we’re really buying. You hear about this all the time during major natural disasters. People think they are covered in the event of a flood, only to find out that they are not. Same goes with an earthquake.
To avoid this kind of tragedy, you need to know what your homeowners insurance covers. Specifically, you want to know what you’ll receive in the event of a total loss, and any additional coverages you might need. That’s where we’ve done the work for you. Here, we break down the types of homeowners insurance policies by several different categories.
The Basic Types of Homeowners Insurance Policies
Insurance companies have their own shorthand for different types of standard homeowners insurance policies. There are eight basic types. While they can vary from company to company, these eight types describe the kinds of hazards a policy protects you from.
Here’s a quick overview of the basic options and the types of hazards they cover:
| Policy Type | Hazards Protected | Other Details |
|---|---|---|
| HO-1 (Basic Form) |
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As written, these policies typically only cover the structure of your home. You can sometimes add your personal property to them, though. And you typically don’t get personal liability insurance with this option. |
| HO-2 (Broad Form) | Everything listed above plus:
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These policies typically include coverage for your belongings and may also include some personal liability coverage. |
| HO-3 (Special Form) | All hazards listed above, plus any other hazards not specifically excluded in the policy. | Exclusions typically include floods and earthquakes, but you should check your specific policy for details. These policies typically cover your home and other attached structures and your belongings. They typically also include some personal liability coverage. |
| HO-4 (Tenant’s Form) | Typically covers same hazards as HO-2 policies | This policy is specifically for renters. It doesn’t cover the buildings you live in but does cover your belongings. You can sometimes also add personal liability insurance to your HO-4 policy. |
| HO-5 (Comprehensive Form) | This type of insurance is similar to an HO-3 policy in that it protects against every peril except those specifically listed as excluded. It usually gives you more protection for your belongings and a higher personal liability insurance coverage. | You need to look at your policy’s specifics, of course. But HO-5 policies often exclude the following:
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| HO-6 (Condo Form) | This insurance is specifically for condominium owners. It’s similar to a renter’s policy in that it offers protection for belongings and personal liability. However, condo insurance also protects the parts of the condo for which you are responsible, typically the walls, floors, and ceiling. | The covered hazards for this policy are typically similar to those of an HO-3. Look for specifically excluded incidents. |
| HO-7 (Mobile Home Form) | This type of insurance is similar to an HO-3 but is written specifically for mobile and manufactured homes. | Again, look at your specific policy to understand what hazards are excluded from your coverage. |
| HO-8 (Older Home Form) | Again, the hazards covered for this type of insurance are similar to those covered under an HO-3 policy. But these are made specifically for older homes. | You don’t need this type of policy just based on the date your home was built. But most historic homes and registered landmarks carry this type of insurance. |
The important thing to note about all these types of homeowners insurance is that they vary from policy to policy. Most HO-2 policies will cover the same hazards. Most HO-3 policies will exclude the same hazards. But your policy may have slight differences.
This is why it’s so important to ask your insurance company about the specifics of your policy. And you should also understand under what circumstances an event is covered.
For instance, if you lose power and your pipes freeze and burst, the related water damage may be covered. But if you take on water damage because of a neglected issue you knew about for a while, that may not be covered.
Again, this is why you need to be sure that you talk with your insurance agent about the details of your policy. And, of course, practice proper home maintenance to avoid long-term, avoidable damage.
What About Floods and Earthquakes?
You may notice that even the most comprehensive types of homeowners insurance coverage specifically exclude natural events like floods and earthquakes. That’s because these cataclysmic disasters often cause a lot of loss in a short amount of time. Insurance companies have trouble absorbing these losses.
Flood Insurance
Because of this, the federal government has a flood insurance program that offers insurance against this specific event. You can buy this insurance through the National Flood Insurance Program.
The program sells you federally-backed insurance policies through local insurance providers. You must buy the insurance from an agent who works with the program.
Flooding is very common, and it affects many uninsured homeowners each year. To find out if you need flood insurance, put your address into this interactive map. It will show you the level of flood risk at your address. If you have a moderate to high risk of flooding, you should definitely consider adding flood insurance to your homeowners coverage.
Earthquake Insurance
Earthquake insurance isn’t backed by the federal government. But if you live in California, you can buy it through the California Earthquake Authority. Some insurance companies, especially those in earthquake-prone areas, will let you add earthquake coverage to your general homeowners insurance policy.
Earthquake policies can be relatively affordable up front. But if you have to make a claim, they can be expensive. These policies typically charge between 10 and 20 percent of your dwelling coverage limit when they pay out a claim. So if you have $100,000 of coverage, between $10,000 and $20,000 would be deducted from your settlement.
One final type of homeowners insurance you might consider adding to your policy is sewer backup and flooding insurance. Typical homeowners policies won’t pay for sewer-related plumbing, and this can be a big deal if you live in an area with an old sewer system. You can ask your insurer about adding sewer coverage to your typical homeowners insurance policy for an additional premium.
What About the Amount of Protection Provided?
The covered hazards are just one major component of homeowners insurance policies. The other major component is the amount of protection your homeowners insurance policy provides.
Typical policies will include a payout limit for your actual home and its structure, as well as a payout limit for your personal property. If you have a personal liability policy, that policy’s limit will be stated separately, as well.
But knowing the dollar amount isn’t enough. You also need to understand how the insurance company will value your home in the case of a loss. There are three common ways the insurer will do this, lined out below.
Actual Cash Value
With this type of policy, your limit is based on the market value of your home, usually figured based on what you paid for the home. It’s the same for your personal property. In other words, the limit is the initial cost to purchase a property or item minus depreciation for the number of years you’ve had it.
In the case of your home, the actual cash value is not likely enough to rebuild your home in the event of a total loss. This is why most insurance policies operate off of the second option, replacement cost.
However, it’s not at all uncommon for personal property insurance to cover your property up to the actual cash value. So if you bought a brand new leather couch for $5,000 ten years ago and it’s damaged in a fire, you won’t get a full $5,000 for it. You might get $1,000 or even less, depending on how the insurance company calculates depreciation.
Replacement Cost Coverage
The replacement cost of your home is the amount of money it would take to build the same home in today’s market. So maybe you paid $150,000 for your home. But if it burns to the ground and labor and materials are now more expensive, it might cost $175,000 to rebuild.
This is the type of homeowners coverage you should look for. If your home is a total loss due to a covered event, you’ll be able to rebuild with similar space, features, finishes, and fixtures. Keep in mind when calculating the amount of coverage you need that you don’t need to count the value of your lot in replacement costs. When you buy your home, you also buy the land it sits on. And you won’t have to replace that even in the case of a total loss.
Guaranteed/Extended Replacement Cost
This is a common option for homes with special features or historic homes. Because of their specialty features, such as hand-hewn flooring or detailed woodworking, they can be very expensive to replace. In fact, they may cost much more to replace than their actual market value.
An extended replacement cost policy can also be a good idea if you’re in a disaster-prone analysis. When lots of homes are damaged at once, the cost of materials and labor can skyrocket. That means replacing your home can either take a lot longer or cost a lot more. So adding an additional 20 to 25 percent to your replacement costs can be helpful.
Which Should You Choose?
Most insurance agents will recommend at least replacement cost, if not extended replacement cost. This will protect you against most eventualities if a covered event happens to your home.
However, keep in mind that many policies operate differently for your home’s structure versus your personal property. For instance, you’re likely to wind up with a replacement cost policy for your home but an actual cash value policy for your personal property.
This can keep your insurance coverage more affordable. But it also means you may not be able to afford to replace all of your things if your home is a total loss. So keep that in mind, and ask the insurance company about the potential costs of upgrading to replacement cost coverage for your personal property.
Homeowners insurance is complicated, to say the least. But once you get the basics–policy type, additional coverage, and coverage amounts–down, you’re on your way to getting the right policy for your needs.
Published or updated March 20, 2018.
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