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A homeowners insurance policy will safeguard your house in case of unforeseen events like fire, burglary or natural disaster.
A typical homeowners policy covers both the dwelling itself and your personal belongings within the home. You’ll also typically get coverage for other structures on your property, like a free-standing garage or shed, plus loss of use coverage, which pays for you to stay in a hotel while your home is being repaired. Most policies also cover your liability if someone is injured while on your property. At a bare minimum, make sure your policy includes those four types of coverage.
Homeowners insurance policies are broken down into three main categories, with each policy covering damage caused by different types of events or disasters — referred to as “perils” in insurance-speak.
Homeowners 1 (HO-1)
This is the most basic policy and offers limited coverage; it usually doesn’t cover your personal items within the home. Because of its limited coverage, it is not available in most states. It provides coverage for only the perils that are named in the policy, which typically include:
- Fire or lightning
- Windstorm or hail
- Riot or civil commotion
- Damage caused by aircraft
- Vandalism or malicious mischief
- Volcanic eruption
Homeowners 2 (HO-2)
HO-2 is a step up from HO-1, offering more coverage, usually including your belongings and liability. But it is stilled a named-perils policy, meaning it only covers the perils specifically named in the policy. It includes all of the perils under HO-1, plus the addition of these:
- Falling object
- Weight of ice, snow or sleet
- Water damage from burst pipes or similar event
- Sudden, accidental cracking, burning or bulging of hot water or similar system
- Freezing of plumbing or similar househeld system
- Sudden, accidental damage from artificially generated electrical current
Homeowners 3 (HO-3)
Sometimes referred to as the “deluxe” policy by home insurance providers, HO-3 is an open-perils policy. An open-perils policy will include coverage for all perils except those specifically noted in the policy. Most mortgage providers require a minimum of HO-3 coverage.
In addition to the three main home insurance policies, you can also purchase a policy for non-standard home types.
Perils typically not covered in a homeowners insurance policy include: a flood, an earthquake, sewer backup, or normal wear and tear or maintenance to the home. However, additional coverage can be purchased to protect against these occurrences.
Additions to your home insurance policy are referred to as “floaters,” “riders” or “endorsements.” These can include flood insurance, earthquake insurance, floater policies for valuable items like furs and jewelry, and an umbrella liability policy. We’ll discuss endorsements in further detail later in the guide. Here is what is typically excluded from most standard policies:
In addition to choosing what your policy covers and under which circumstances, you will also need to choose your level of coverage. It can greatly affect how much you will be paid to repair your home and replace items that may have been damaged.
The deductible is how much you must pay toward repairing your home or replacing any belongings that are damaged. You will have to pay a deductible each time you file a claim. Deductibles can either be a set amount or a percentage, but are usually a predetermined amount. The average deductible is $500-$1,000.
The deductible for your policy is determined when you purchase your insurance policy. A higher deductible results in a lower premium. But make sure your deductible is low enough that you can afford to pay it if you need to repair damage to your home that is covered by your policy. Your mortgage company also might put a limit on how high your deductible can be.
Case study: deductibles
When Jess purchased her home she wanted to get the least expensive home insurance she could find. So she opted for the highest deductible her mortgage company would allow, which was $1,500. Soon after moving into her home, a hail storm caused severe damage to her roof and needed to be completely replaced. She filed a claim with her insurance provider and got an estimate for the roof. The cost of a new roof would be $8,850. But because her deductible was $1,500, her insurance company cut her a check for $7,350. Jess had to cover $1,500 of the cost to replace her roof.
There are many ways to lower your costs.
Water, storm damage and theft are three of the most common insurance claims. Be proactive and minimize the risks to your home.