A homeowners insurance policy provides you with financial protection in the event of a disaster or accident involving your home. A standard homeowners insurance policy insures your home’s structure (house,) and your belongings in the event of a destructive event, such as a fire.<\/p>
In addition, homeowners insurance policies are generally “package policies.” This means that the coverage includes not only damage to your property but also your liability\u2014that is, legal responsibility\u2014for any injuries and property damage to others caused by you or members of your family (including your household pets).<\/p>
All forms of home insurance also provide additional living expenses (ALE) coverage for the extra costs of living away from home if it is uninhabitable due to damage from an insured disaster.<\/p>
Homeowners insurance is a form of\u00a0property insurance\u00a0that covers losses and damages to an individual’s residence, along with furnishings and other assets in the home. Homeowners insurance also provides liability coverage against accidents in the home or on the property.<\/p>
A homeowners insurance policy usually covers four kinds of incidents on the insured property: interior damage, exterior damage, loss or damage of personal assets\/belongings, and injury that occurs while on the property. When a claim is made on any of these incidents, the homeowner will be required to pay a deductible, which in effect is the out-of-pocket costs for the insured.<\/p>
Every homeowners insurance policy has a liability limit, which determines the amount of coverage the insured has should an unfortunate incident occur. The standard limits are usually set at $100,000, but the policyholder can opt for a higher limit. If a claim is made, the liability limit stipulates the percentage of the coverage amount that would go toward replacing or repairing damage to the property structures, personal belongings, and costs to live somewhere else while the property is worked on.<\/p>
Acts of war or acts of God such as earthquakes or floods are typically excluded from standard homeowners insurance policies. A homeowner who lives in an area prone to these natural disasters may need to get special coverage to insure their property from floods or earthquakes. <\/p>
However, most basic homeowners insurance policies cover events like hurricanes and tornadoes.<\/p>
To better understand\u00a0how the different types of home insurance work, it\u2019s important to know how they\u2019re set up. A \u201cperil\u201d is an incident or problem that causes damage to your home, yourself or your belongings. Generally, there are two ways coverage is explained in a policy\u2014open peril and named peril:<\/p>
Here\u2019s a roundup of the eight different types of homeowners policies for homeowners.<\/p>
Also known as basic form homeowners insurance, the HO-1 provides bare-bones coverage. An HO-1 policy will pay out only if one (or more) of 10 specific perils damages your home:<\/p>
An HO-1 policy is limited because it typically covers only these 10 perils instead of the 16 or more that other policies do. It generally provides coverage only for the house structure, at actual cash value. That means you won\u2019t get the amount you\u2019d need to fully rebuild, but rather the value of the house minus deprecation for its age. It generally doesn\u2019t cover personal property, liability, or additional living expenses.<\/p>
The HO-1 costs less than other types of coverage because it provides the least coverage. It is not available in most states and, if you have a mortgage, you usually are required by a lender to have higher levels of protection.<\/p>
Also called the broad form, the HO-2 policy provides coverage for more perils than the HO-1 policy. The HO-2 policy covers all the perils in an HO-1 policy plus:<\/p>
An HO-2 policy includes:<\/p>
Also, under an HO-2 your belongings are covered for actual cash value only, which is how much the items are worth after depreciation.<\/p>
The HO-3 policy provides suitable coverage for most homeowners and is the most common home insurance policy type. It covers your house and belongings and includes coverage for liability, medical payments to others and additional living expenses.<\/p>
An HO-3 policy, unlike the HO-1 and HO-2, protects your house from all perils unless they are specifically listed as exclusions. This is called an \u201copen peril\u201d policy. Also known as a special form, an HO-3 policy will pay to repair or replace your house, up to your policy limits, as long as the damage was not due to these typical exclusions:<\/p>
For your belongings such as electronics, furniture and clothing, an HO-3 policy provides coverage for 16 perils:<\/p>
Known as\u00a0renters insurance, the HO-4 policy is for people renting houses and apartments. Belongings are covered for the same 16 perils listed in the HO-3 policy. Additional living expenses and liability coverage are also included.<\/p>
An HO-4 policy will not cover damage to the rental unit itself. A landlord would need their own landlord insurance policy to cover the structure.<\/p>
Called a comprehensive policy, an HO-5 policy offers the highest level of insurance coverage for houses and belongings. It covers your house and belongings under all circumstances except those listed as exclusions in the policy. The exclusions for HO-5 policies are the same as those under an HO-3.<\/p>
An HO-5 policy will pay out for replacement costs rather than actual cash value. An HO-5 also includes coverage for liability, medical payments to others and additional living expenses.<\/p>
These comprehensive policies are often good for insuring new construction. Not all home insurance companies offer HO-5 policies.<\/p>
The HO-6 policy is for people who live in a condo or a co-op. Known as \u201cwalls-in coverage,\u201d a\u00a0condo insurance\u00a0policy covers:<\/p>
Before buying an HO-6 policy, it\u2019s a good idea to review your condo association\u2019s insurance policy. You want to avoid gaps in coverage and also sidestep any duplicate offerings with the association\u2019s insurance.<\/p>
The HO-7 policy has similar coverage to an HO-3 policy but it applies to mobile homes. Mobile home insurance\u00a0is an open peril policy for the structure of the mobile home or trailer. Like the HO-3, that means it covers any damage as long as it is an exclusion. Coverage for belongings is only for specific perils listed in the insurance policy, like to HO-3.<\/p>
HO-7 policies insure these types of structures:<\/p>
An HO-7 policy typically only covers a mobile home when it is stationary. It does not provide coverage when the home is in transit.<\/p>
HO-8 home insurance policies are generally for older homes usually built more than 40 years ago. For these houses, the cost of rebuilding is usually greater than the home\u2019s market value. Historic homes and registered landmarks usually have HO-8 policies. An HO-8 policy only covers your house and belongings for 10 specific perils listed in the policy:<\/p>
Coverage for liability, medical payments to others and additional living expenses is also included under an HO-8.<\/p>
When applying for a\u00a0mortgage, the homeowner usually is required to provide proof of insurance on the property\u00a0before the financial institution will loan any funds. The property insurance can be acquired separately or by the lending bank. Homeowners who prefer to get their own insurance policy can compare multiple offers and pick the plan that works best for their needs. <\/p>
If the homeowner does not have their property covered from loss or damages, the bank may obtain one for them at an extra cost.<\/p>
Payments made toward\u00a0a homeowners insurance policy are usually included in the monthly payments of the homeowner’s mortgage. The lending bank that receives the payment allocates the portion for insurance coverage to an\u00a0escrow account. Once the insurance bill comes due, the amount owed is settled from this escrow account.<\/p>
A homeowners insurance policy also differs from\u00a0mortgage insurance. Mortgage insurance is typically required by the bank or mortgage company for homebuyers making a down payment of less than 20% of the cost of the property. The Federal Home Administration also requires it of those taking out an FHA loan.1\u00a0It’s an extra fee that can be figured into the regular mortgage payments, or be a lump sum charged when the mortgage is issued.<\/p>
Mortgage insurance covers the lender for taking on the extra risk of a home buyer who doesn’t meet the usual mortgage requirements. If the buyer should default on payments, the mortgage insurance would compensate. While\u00a0both deal with residences, homeowners insurance protects the homeowner, and mortgage insurance protects the mortgage lender.<\/p>
While the terms sound similar, homeowners insurance is different from a\u00a0home warranty. A home warranty is a contract taken out that provides for repairs or replacements of home systems and appliances such as ovens, water heaters, washers\/dryers, and pools. These contracts usually expire after a certain time, usually 12 months, and are not mandatory for a homeowner to buy in order to qualify for a mortgage. <\/p>
A home warranty covers issues and problems that result from poor maintenance or inevitable wear-and-tear on items\u2014situations in which homeowners insurance doesn’t apply.<\/p>